goldman sachs S&P 500

Goldman: “Cognitive Dissonance” Reigns In US Stock Market

"Cognitive dissonance exists in the US stock market. S&P 500 is up 10% since the election despite negative EPS revisions from sell-side analysts (see Exhibit 1). Investors, S&P 500 management teams, and sell-side analysts do not agree on the most likely path forward."

Well it’s Saturday, and you know what that means.

It means it’s time to ask Goldman what they found out from client meetings and time to act like the first thing clients ask isn’t always this:

When did you talk to Gary Cohn last and does he have a plan to help rein in this f*cking Trump clown show?

That question will take on special significance going forward as Cohn is apparently the man when it comes to crafting what Trump has promised will be a “phenomenal” tax plan. Recall this from Bloomberg:

  • Trump’s ‘Phenomenal’ Tax Plan Is Real: White House Official Says
  • President Trump will have a tax plan to present that is separate from his proposed budget and is expected in the next few weeks, a White House official says.
  • Top White House economic adviser Gary Cohn and his team are working on the plan and unidentified congressional leaders are in the loop, official says
  • Official asked not to be identified because plan still under development
  • NOTE: Cohn is former Goldman Sachs president, now director of Trump’s National Economic Council
  • White House spokeswoman Lindsay Walters no details

Right. “No details.” That’s probably because no one had any idea Trump was going to up and promise a group of airline execs that tax reform was a mere two weeks out.

Of course tax reform plays heavily into investors’ outlook for corporate America. Indeed it plays heavily into corporate America’s outlook for corporate America. Recall this chart I ran earlier this week:



That’s really all you need to know when it comes to Q4 earnings calls and how corporate management teams are feeling about things, but if you want the details, you should check out “Here’s What Corporate America Is Most Concerned About.”

With all of the above in mind, consider the following from Goldman who notes a growing discrepancy between what investors and management are saying and what analysts believe is reality.

Via Goldman

Cognitive dissonance exists in the US stock market. S&P 500 is up 10% since the election despite negative EPS revisions from sell-side analysts (see Exhibit 1). Investors, S&P 500 management teams, and sell-side analysts do not agree on the most likely path forward. On the one hand, investors, corporate managers, and macroeconomic survey data suggest an increase in optimism about future economic growth. In contrast, sell-side analysts have cut consensus 2017E adjusted EPS forecasts by 1% since the election and “hard” macroeconomic data show only modest improvement.


Investors are optimistic about an improvement in economic growth and the prospect of increased corporate EPS. All 11 sectors contributed to the 10% rise in the S&P 500 index, with Financials and Information Technology contributing 30% and 22% of the 208 point gain. Decomposing the strong performance shows reduced EPS growth has been more than offset by P/E expansion which accounts for all the index gain.

Corporate management teams agree: commentary in 4Q earnings transcripts was upbeat and guidance has been above average. As we note in our recently published S&P 500 Beige Book report, executives are particularly optimistic about potential corporate tax reform, deregulation, and increased federal infrastructure spending. Next quarter guidance was more positive than usual, with 36% of companies that provide guidance guiding above consensus (vs. an average of 27%).

Also supporting increased optimism, macroeconomic survey data has been historically strong. The Philly Fed’s manufacturing index rose to +43.3 on Thursday – handily beating the median forecast of +18.0 and reaching its highest reading in the last 33 years. Confidence is also soaring among small business owners as the latest reading of the National Federation of Independent Business (NFIB) Small Business Optimism Index was 105.9, ranking in the 98th historical percentile of readings since 1974. The widely followed ISM manufacturing index notched a reading of 56.0, well in expansion territory and the highest level since late 2014.

However, analyst EPS estimates paint a different picture. Consensus 2017E adjusted EPS has been revised downward by 1% over the last 3 months. Sell-side analysts appear hesitant to incorporate potential tax reform and deregulation into their estimates given elevated policy uncertainty. Positive revisions to aggregate S&P 500 EPS estimates are rare – during the last 33 years, consensus EPS estimates have been revised upward from their starting point just six times.


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