For Wall Street analysts, the current price of US stocks is too high, which seems to be an open secret. One of the most obvious signs is that investors are over-excited.
Investors are extremely optimistic
Citi analysts emphasized this in previous reports. The company’s chief economist Tobias Levkovich said that Citi’s latest panic/excitement index has reached a record 1.83, which is a step up from the previous week’s 1.69, indicating that the market is extremely optimistic.
Levkovich pointed out that this means that in the next 12 months, the probability of US stocks falling from current levels is close to 100%.
It seems that this is reflected in the fact that the S&P 500 has fallen 1.5% in the past week.
Excessive preference risk
Goldman Sachs issued a similar warning and used another indicator: the Goldman Sachs Risk Appetite Index (RAI).
Analyst Christian Mueller-Glissman pointed out that RAI reached 1 last week, which is the highest in 4 years and only slightly lower than the historical high, which means that investors’ risk appetite has risen sharply since the fourth quarter of last year.
Goldman Sachs’ risk appetite model usually considers the overall economic level. A low risk appetite and an economic rebound can be seen as a bottoming out signal, and the stock market may collapse from a high point due to an overvaluation combined with a weak economy.
Goldman Sachs pointed out that market optimism largely comes from optimistic expectations for the economic outlook in 2021, believing that the vaccine is progressing well and the Federal Reserve will not easily tighten it. The situation of other holding positions also shows the optimism of investors.
Goldman Sachs warned that although sentiment and holdings are rarely a catalyst for market reversals, in extreme cases, like current data, it may increase the risk of market reversals.
When the market has established high expectations, once the actual policy falls short of expectations, or the epidemic worsens, it is likely that there will be a sell-off, which will hit the market hard.
Not yet time to sell
Goldman Sachs said that risk appetite is often slowly established and built a long-term bull market with the support of fundamentals, but this is not the current state of development.
Although Goldman Sachs warned of the possible downside risk of US stocks, they still do not recommend customers to sell. Glissman pointed out that as long as the overall economic level remains favorable, risk appetite may still be high for a long time.
This is also the basic view of Goldman Sachs in 2021. They predict that the S&P 500 index will rise to 4100 points at the end of this year and 4400 points in two years.
Therefore, knowing that it is a bubble, Goldman Sachs believes that it is not yet time to leave. Goldman Sachs admits that it is difficult to rely solely on RAI to grasp the timing of buying and selling.
Glissman said that when the RAI is above 0.9, waiting until it drops below the normal 0.75 may be a good time to reduce risk.
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