Goldman Sachs: Investors are at 'maximum optimism' and have a letdown coming

Goldman Sachs: Investors are at 'maximum optimism' and have a letdown coming
Goldman Sachs: Investors are at 'maximum optimism' and have a letdown coming

In addition to pushing up stock indexes, investors also are pouring cash into the market. Funds focused on U.S. stocks have taken in a net $52.2 billion this year, according to Bank of America Merrill Lynch, and money even has been moving into mutual funds lately.

Sentiment indicators are showing strong results as well, particularly among professional investors. The most recent Investors Intelligence survey showed the bulls at 61.8 percent, near a 13-year high.

Kostin sees a dichotomy between investor hopes and the reality on the ground, and says it's indicative of "cognitive dissonance" in the market.

"On the one hand, investors, corporate managers, and macroeconomic survey data suggest an increase in optimism about future economic growth," he said. "In contrast, sell-side analysts
have cut consensus [full-year] adjusted [earnings per share] forecasts by 1 percent since the election and 'hard' macroeconomic data show only modest improvement."

Investors have pinned their hopes to Trump's plans to cut taxes, reduce regulations and increase domestic government spending. However, Kostin thinks tax reform probably won't get done until the back half of the year.

As that reality sets in, the market will have to reduce its expectations for the effect that lower taxes will have on corporate earnings.

"We recommend investors focus on stocks with high secular growth prospects rather than 'winners' and 'losers' from potential tax reform," Kostin said.

Indeed, there are multiple headwinds that could come along to thwart a rally that seems priced for perfection.

Mohamed El-Erian, chief economic advisor at Allianz, warned Tuesday that rising interest rates ahead will pressure the U.S. dollar higher, which also could hamper market values. He also warned about the possible fallout should tax reform efforts in Washington fall short of expectations.

"First, I think you'll see lower markets. Second, you'll see very different sector performances," El-Erian told CNBC. "You would see quite a few movements within the market and overall."

CNBC

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