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Wall Street’s Rising Euphoria May Spell Trouble for Stock Market

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January 9, 2018

Euphoria on Wall Street that stocks can just keep on building on record highs is getting so stratospheric that it’s reaching levels that previously signaled a slump.

Analysts are ratcheting up their forecasts for U.S. corporate profits at the fastest pace in more than 10 years, according to the research firm Bespoke Investment Group. And that’s happening, unusually, right in the run-up to an earnings-season kick-off. While the upgrades could be taken as a positive reflection on the economy’s outlook, in the past such bullish analyst sentiment has served as a precursor to a market decline.

The last time the gap between analysts lifting forecasts and those lowering estimates was this wide was in May 2010. The divergence at the time widened after the U.S. S&P 500 Index had climbed more than 10 percent over the previous three months. Just before analyst sentiment peaked, stock prices also topped out, and the index slid more than 15 percent.

Similarly, analysts are upgrading their estimates now in wake of a strong performance in equities. The S&P 500 jumped 6.1 percent last quarter, and has had its best start to a year since 2006. The earnings season gets into swing this week with reports from JPMorgan Chase & Co. and Wells Fargo & Co.

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This article was posted: Tuesday, January 9, 2018 at 8:55 am

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