Current stock market rally: Rational or irrational exuberance? – USA TODAY

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“Because of me.” Time

Amid talk of a frothy, overpriced U.S. stock market, Goldman Sachs has come up with a way to make its point that the current rally on Wall Street is being driven by “rational” exuberance, not a speculative mania.

In his 2018 U.S. stock outlook, Goldman Sachs’ David Kostin sees the Standard & Poor’s 500 index rising to 2,850 by year-end 2018, an 8% rise from current levels, powered by strong corporate earnings and above-trend U.S. growth.

Kostin downplays talk of the current market being overly exuberant, arguing that valuations, while stretched, “appear reasonable” given the high level of corporate profitability.

So what would irrational exuberance look like? In short, a sharp late-cycle market rally such as the “exponential trajectory of stocks in the late 1990s,” Kostin wrote. If the current bull matched the S&P 500’s frenetic percentage gains in the final three years of the 1990s bull run, the large-company stock index would trade at 5,300 by year-end 2020, a roughly 100% gain from current levels.

What’s more, if stocks, which now trade at around 18 times earnings, instead trade at a similar price-to-earnings multiple such as the 24 P-E in the tech bubble, it would imply an S&P 500 level of 4,050 three years from now, or 53% higher than current levels.

Compare those two lofty year-end 2020 levels to Kostin’s more restrained estimate of 3,100 for the large-company stock index.

His more “rational” market call amounts to a total three-year gain of roughly 17.5%, or about 6% a year.

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On the 30th anniversary of the 1987 stock market crash, U.S. stocks are at a record high and investors are concerned that steep valuations may mean a correction is overdue. Video provided by Reuters Newslook

 

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