What If The "Exuberance" Is "Irrational"? Then Hold On To Your Hats...

Tyler Durden's picture

As discussed earlier, Goldman's entire S&P500 price forecast for 2018 and the next three years is based on two things: tax reform passing, but more broadly, something that David Kostin dubbed "Rational Exuberance", to wit:

“Rational exuberance” best describes our forecast for the trajectory of the S&P 500 during the next several years. Earnings drive stocks over time and should support the index rising to 2850 at year-end 2018, 3000 at the end of 2019, and 3100 by the close of 2020, representing a price gain during the next three years of 20%. Our price targets imply a modest expansion in forward P/E multiple to 18.2x at year-end 2018, a flat multiple in 2019, and a contraction to 18.1x in 2020.

As Kostin describes it, "rational exuberance" is defined by "above-trend US and global economic growth, low inflation, low albeit slowly rising interest rates, and underlying corporate profits boosted by pending corporate tax reform likely to be adopted by early next year."

So far so good, but as Kostin also explained, absent tax reform passing, the S&P will not only not hit 3,100 in 3 years, it may well be lower: "Assuming tax reform passes, we forecast S&P 500 adjusted EPS will jump by 14% to $150 in 2018. Equity investors will be rewarded as the index advances by 11% to 2850 at year-end 2018 and delivers a total return of 13% including the 2% dividend yield." Meanwhile, "If tax reform fails, S&P 500 will fall near-term by 5% to 2450."

It was not clear what would happen to Goldman's 2020 S&P price target of 3,100 if tax reform does not pass.

What was clear is what would - according to Goldman - happen if the rational exuberance is, in fact, irrational. Here the bank notes that it is impossible to know ex post what flavor the current exuberance has: "Unfortunately, it is only in retrospect that one can definitively establish that assets have reached unsustainable levels. Greenspan was prescient, but three years early. Following Greenspan’s speech warning of the potential for excessive valuations, the S&P 500 subsequently more than doubled (+116%) during the next three years before the Tech bubble finally peaked in March 2000 at a forward P/E multiple of 24x."

So what would happen if the exuberance that awaits the S&P is, in fact, irrational? To that question, Goldman has a ready answer: "We would deem it “irrational exuberance” if the S&P 500 during the next three years followed the exponential trajectory of stocks in the late 1990s."

In such a case, Goldman predicts that the S&P 500 would trade at 5300 by year-end 2020 (a 105% rise from today). If slightly "less irrational" bubble over the next three years would mean stocks instead trade at a similar forward P/E to the Tech Bubble (24x), and would imply a year-end 2020 index level of 4050 (57% above today). During the three years post Greenspan’s speech, S&P 500 EPS rose by 26% ($40 to $50). Translated to today, Goldman calculates such a growth rate would imply 2020 EPS of $166 compared with our estimate of $163.

And for the visual traders, the light blue line in the chart below - i.e., the "irrational" one - would recreate the late 1990s exuberance in the context of today's market.

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JoeTurner's picture

"Pets.com is poised to be the next multibillion e-commerce empire"

Able Ape's picture

Along with Webvan - these are sure bets, what could go wrong?...

FreeShitter's picture

"One of these men may save your life someday" -- Sgt. Hulka

"Then again, maybe one of us won't"  -- John Winger

 

Stripes.

Doom and Dust's picture

Exuberance can remain irrational longer than I can remain sane.

california chrome's picture

E-Mini S&P 500 = 2600.  Booya.

TabakLover's picture

Tyler, when are you posting the analysis from your shoeshine boy?

Scornd's picture

Because you can't lose lol

Iconoclast421's picture

Given all the money that's been printed, we really have not seen the really crazy shit that comes at the end of a cycle. 2007 was wacky shit. Right now some stuff seems crazy but you really have to remember there's sooooo much more money out there. Take every wild and crazy number you've seen and multiply it by 10 and thats what we see before this crap ends (and the next round of printing truly begins!) Think $400 billion merger. Think $3 billion paintings. Think $200 million penthouse. Think $30000 bitcoin! $15 million grilled cheese truck! Every frickin central bank around the world is gung ho about crushing their respective middle classes. This is an explosion of fiat. What we have now is just a kindlign fire.

Turin Turambar's picture

Bitcoin will go above $100k by end of 2018.  Just hide and watch.

Iconoclast421's picture

I hope so because that will provide enough motivation to figure out how to get that bitcoin I mined back in 2012. Right now the mining software I used is still sitting in a folder I havent looked at in years lol. $6k isnt enough to bother with but $100k would be.

adr's picture

But Zero of that printed money went anywhere other than the pockets of the 1%, so in reality it didn't matter. If the trillions went into capital expenditures, maybe we would have had real growth but it just went to pumping up commodity contracts and buying back stock. IN effect robbing the future of trillions in productive assets. 

Scornd's picture

What about fractional reserve banking? There's only 3% paper money out there the rest in 1and 0-- is that what people are calling "printing?"

August's picture

$15 million is not an unreasonable valuation for a grilled cheese truck, especially when it's part of a co-ordinated plan to dominate the grilled cheese space.

"Dominating the Grilled Cheese Space" is still a favorite when it comes to bullshit IPOs.  FWIW the Grilled Cheese Truck, Inc. website is currently non-functional, which may bode ill for the future of the Grilled Cheese Space, and those would seek to dominate it. 

Perhaps someone should encourage Elon to jump in....

PodUK's picture

there is nothing rational about it, and at some point over the next few years we will see equities down at least 50% if not more

https://www.crescat.net/wp-content/uploads/Crescat-Capital-Q3-2017-Quart...

 

adr's picture

Why not just say S&P 10,000 and DOW 100k. It doesn't represent anything other than fraud, so the level that represents the fraud is immaterial.

There is nothing rational going on anywhere. What we must look forward to is peak irrationality, which is almost unfathomable considering the insanity going on. Bitcoin, possible Trillion Dollar marketcap for a single product company with declining marketshare, fluid genders, kneeling negroes, Trump as the best choice for president, Middle East insanity, North Korea, $2.70 gas with $55 oil, etc, etc.

When I realize that I have been alive for four decades and what has transpired during that time, it seems like a Twilight Zone episode or maybe I diverged in 1985 into Biff's World.

khakuda's picture

Don't forget unaffordable healthcare and college that costs $70,000 a year of after tax money...all while they tell you inflation has been too low.

We have deluded people running the world.  The truth would be so hard to bear, it is swept under the rug.

Pollygotacracker's picture

They aren't deluded. They know precisely what they are doing.

illuminatus's picture

Come on!!!!!!!!!!!!!! Deluded?????

BandGap's picture

And if you were around for 5.5 decades you would be saying shit like "man, I miss the 70s".

I'm enjoying the show. Whenever my wife starts thinking nothing is going to change, this is the new normal, we just look at the situation from 10 years ago till now and then go back to getting ready. Thinking along these lines is fortified by having children who never knew not locking your doors at night, playing college and professional sports for fun and not being tethered to a "phone" all day long.

Oh, the change is gonna be something.

 

Honest Sam's picture

I dream of a world in which Greenspan's forbears didn't survive the Holocaust or were rendered sterile. 

 

adr's picture

West Coast libtards who write for blogs all say that the new Wolfenstein game is a warning about the Alt-Right and Trump taking over America. In fact the game is actually nothing but an attack on White American values. Your classic white America is depicted as Nazi propoganda in the game and you are fighting to destroy it. One of your allies is a 1970s looking ghetto bitch trying to take down whitey.

Is it wrong to actually like the America portrayed in the game after it was taken over by the Nazis?

Does this look so bad? well other than the cameras everywhere. Wait, we have cameras everywhere now so it isn't any different.

http://www.rollingstone.com/glixel/features/hands-on-with-wolfenstein-ii...

Consuelo's picture

 

 

All of which to say is:

QE by any other name - overt or (stealth) in nature, has Worked.

I didn't say for whom it worked...   I said that it worked - and keeps working to this day...

In a cynical bent, we really should start looking (and calling) it this way on any type of article which paints the economic picture as positive, should we not...?

 

khakuda's picture

This market is a speculator's dream.  A central bank funded purposeful stock market bubble.  Saying you won't raise rates until you see inflation in a statistic designed to not show inflation means you aren't going to raise rates ever.

MrBoompi's picture

Only algorythms pay attention to Fed chairs.  

illuminatus's picture

In my opinion Zero hedge shouldn't even cover a fucking thing this lying piece of shit has to say. The fucking prick opens his mouth and nothing but lies spew out of his ass face. 

khakuda's picture

The problem with this theory is that it is straight lining earnings upwards.  Remember 2008?  How about the fact that the major industrial company in the US started this year with earnings estimates at $2 and now looks to earn half that.  S*** happens and the market isn't pricing for it,

FredGSanford.'s picture

So, everyone can’t get rich????

GoingBig's picture

the real question is what if the exuberance is rational.  That is one of the things ZHers have been in denial about for 7 years now.

Brazen Heist's picture

Herd behaviour is rational only from the viewpoint of the individual involved. 

Looking at the herd from afar, it behaves rather irrationally.

Scornd's picture

He looks like a dick wearing Birth Control Glasses and a yamika

RationalExuberance's picture

What about the supervolcanos tho'?

ZH spread: long gold, short TSLA.