Goldman Sachs: Market Already Hit ‘Point of Maximum Optimism’
Goldman Sachs’s chief US equity strategist’s interview with CNBC
On Tuesday, April 11, 2017, in an interview with CNBC, the chief US equity strategist at Goldman Sachs (GS), David Kostin, discussed his views on the market’s movement, valuations, earnings, inflation, and bond yields.
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David Kostin on market movement
David Kostin said that his investment firm believes that the market has already reached the “point of maximum optimism.” Since the US election, optimism has played an important role in market movement. The optimistic view on the US economy (VFINX) (VOO) and the business-friendly sentiment under President Donald Trump are the major factors behind the market movement.
However, in March 2017, the market showed some pullback. The delay in policy reform weighed on the index. David Kostin said, “My characterization that early March will be the point of maximum optimism reflects that view. [With the] latitude of what might have taken place, whether it’s health care, whether it’s tax reform at the beginning of March, now as the days go by, the degrees of freedom start to narrow.” He added, “Maybe the tax reform will take place, but it might not take place till next year.”
The S&P 500 Index (SPY) (QQQ) rallied nearly 10.3% between November 8, 2016, and February 28, 2017. On March 1, 2017, it reached a record high level of 2,400.98. In March 2017, it fell nearly 1.4%. If the expected policy changes don’t occur within the expected timeframe, then the market might see some setbacks, according to Larry Fink.
Market valuation and corporate earnings generally drive markets. Kostin believes the expansion in the price-to-earnings multiples and rising valuations in the last five years have been driving market movement. The S&P 500 Index is currently trading at a price-to-earnings multiple of 21.3x. Five years ago, it was at 10.12x. EPS (earnings per share) growth hasn’t improved significantly. He expects that earnings may show modest growth in 2017.
In the next part of this series, we’ll analyze David Kostin’s view on bond yields.