On May 12, the professional Tea Leaf Leader at Goldman Sachs Research predicted that the S&P 500 would increase roughly. 11% It will reach 6,500 over the next 12 months. We forecast in one month, with the S&P 500 up from 5,844 to 6,045 to about 3.4%.
Goldman’s optimism is based on a decline in US-China tariff insecurity, with better forecasts of economic growth than expected. Bank economists are expected to bring the possibility of a US recession to just 35% in the next 12 months, with GDP expected to grow by 1.6%.
This is a big question that Goldman’s chief equity strategist David Costin wants to answer. “Who is going to pay the increased tariffs?”
Do Chinese producers eat the cost? Will Walmart take it out of the already thin profit margin of razors? Will consumers get stuck at a higher price?
These questions will not be answered more than another quarter. First quarter revenue showed healthy growth of 12% year-on-year. But this was before the trade war began. The second quarter results are when we are likely to begin to see the impact of declining demand and lower profit margins.
It is also possible that trade debate with China has not reached an agreement. What does this mean for Goldman’s 12-month forecast?
The S&P 500 could certainly continue to rise in the face of economic deteriorating. We all know that Wall Street and President Trump are keen to cut interest rates.
Perhaps bad news for the economy, such as slowing growth and rising unemployment, will force the Federal Reserve to cut back. This is considered good news for stocks by the public of investors who always want a reason to buy.
Has a new bull market been born?
Wall Street cheerleaders have a reason to celebrate. The S&P 500 recently surpassed its April 8 low by 20%. This means that a new bull market has officially been born. The fear of the tariffs in early April disappeared like mist under the morning sun.
CNN Fear & Greed Index I am now pointing out greed firmly. “Greedy” reading means that investors show a high level of optimism and willingness to take on more risks. This also means there is a strong buying pressure and investors are willing to raise the stock price.
Furthermore, the Association of American Individual Investors (AAII) investigation We are in the process of being forceful. The bear percentage had fallen to 33.6% as of June 11th. This remains above the historic average of 31.0%, but a major setback from the 61.9% rise we witnessed in early April. Retail investors seem to be seduced by meat grinders.
From our perspective, this is not a real recovery. Obviously, it is not driven by a strong economic foundation. In fact, it’s not a new bull market. It’s the same old bull market that is rising in the ever-growing flow of debt.
The outlook for Fed rate reduction is to add more fuel to fires. President Trump is actively lobbying Fed Chairman Jerome Powell to cut interest rates in full. He wants Rocket fuel!
Powell has resisted Trump’s demands and calls for names up until now. But he eventually bends. All that is needed is a negative economic data report that he can point out for justification. Then Trump will get his way…though he may not get the results he expects.
What your broker won’t tell you
The rise in stock prices in the face of worsening economic foundations is the best kind of bull market. It rewards people at risk with no heart and punishes careful pragmatism. However, you need to value the risks highly.
The popular financial services industry wants people to believe that stock market parties can last forever. They point to headlines, quarterly revenue, and S&P 500 momentum.
At the same time, they ignore the real underlying market foundations. Those who pause to consider actual market valuations are quickly aware that the S&P 500 rise index is built on a sand foundation.
Looking at the periodically adjusted prices and rate of return (CAPE), you won’t hear from a broker.
The regular price to revenue (P/E) ratio is simple enough. It tells you how much you will pay for one dollar of the company’s income. However, the problem with the straight P/E ratio is that revenues can be unstable. Good quarter, one bad year, P/E is skewed. So Robert Schiller came up with the idea of a cape ratio.
In addition to using the latest year revenue, the CAPE ratio takes the current price of the S&P 500 and splits it by the average of inflation-adjusted revenue over the past decade. This smoothes out the volatility and gives you a more clear picture of whether your inventory is really cheap or expensive.
What does this key metric tell you today?
At the market closure on June 12th, the S&P 500 cape ratio will be 37.05. From a perspective, the historic average CAPE ratio for the S&P 500 since 1881 is 17.24.
Cape Crusader announces bubble
Looking at the cape at 37.05, we see a market that is more than twice the long-term average. This is not a small overprice. Rather, it is an extremely overrated one. In fact, this is a bubble.
Historically, whenever the Cape ratio has risen so much, investors’ returns over the next decade were terrible, and in many cases negative in real (inflation-adjusted) terms.
To be clear, cape ratios are not explicit market timing tools. The assessment over the next few months can always be even more extreme. However, Cape offers insight into future long-term returns. It shows that you are currently paying premiums for assets that are unlikely to provide satisfactory returns for years, if not decades.
Over the coming months, the Fed’s cut out prospects could inflate the bubble even further. Lower borrowing costs as a central bank operation product tend to promote speculation. This could potentially increase your S&P 500 index in the short term. By then, potential rewards will be completely overwhelmed by the underlying risk.
The current cape ratio is approaching the dot-com bubble of the late 1990s, when it peaked at 44.19 in December 1999. It has surpassed the peak of 31.48, which was a hit just before the crash in 1929. Both of these episodes ended in tears.
So, the Cape Crusader warning is clear as the S&P 500 runs at a new all-time high in the coming days. Investors are currently paying ridiculous bubble prices for revenue.
Warning emptor.
[Editor’s note: Trump Sends Strange “Coded” Message to Conservatives (Liberals Can’t Figure It Out!). Democrats are complaining that Trump is doing something illegal… but conservatives understand EXACTLY what he’s telling them to do. Click here to see what we see next for Trump’s “Master Plan”.]
