Goldman Sachs sounding caution - Bloomberg

As reported by Bloomberg, Goldman Sachs is joining a growing group of investment banks that are increasingly concerned about the rising divergence between US investor optimism and the state of things throughout the rest of the world.

Key quotes

"Sentiment has climbed to levels that foreshadowed the year’s worst rout, prompting Citigroup to caution that another pullback may be in the offing. At Goldman Sachs, elevated valuations and a tightening labor market have driven the firm’s bull/bear market indicator to alarming highs.

It doesn’t mean the bull market will end soon. But after a 9 1/2-year rally where the S&P 500 rose 19 percent annually, investors should be prepared for lower returns in coming years, according to Goldman Sachs strategists led by Peter Oppenheimer. The firm’s bull/bear market indicator has shown a close relationship with the S&P 500’s forward returns since 1955, with peak readings coinciding with the start of the last two bear markets. Right now, it’s “flashing red”, said the strategists.

“Typically, high valuations – or an extended level of this index – imply the risk of a bear market or a period of low returns over the next five years,” the strategists wrote in a note late Tuesday. “This time we think that lower returns are more likely than an impending sharp bear market.”

The fastest economic expansion in four years, two consecutive quarters of 24 percent earnings growth and record buybacks are fueling confidence in the bull market, which by some measures has surpassed the dot-com era’s as the longest in history. With too many bulls chasing the rally, Citigroup’s strategists led by Tobias Levkovich are urging investors to cut back risk as Friday’s labor-market report could spark a selloff, just it did in February."