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

The New York Stock Exchange (NYSE) is reflected in a mirrored-sign in New York, U.S., on Monday, Jan. 8, 2018. U.S. stocks were mixed, with the S&P 500 Index on track for its first decline of the year, as investors assessed the prospects for corporate earnings, while the dollar strengthened after three straight weekly declines. Photographer: Michael Nagle/Bloomberg

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.

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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.

Looking at members of the broader S&P 1500 Composite Index, the pace of upward revisions of earnings-per-share estimates has reached the highest in more than 10 years, Bespoke Investment Group calculations show.

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The rising optimism has triggered warnings from some quarters, including analysts at Citigroup Inc. and Pacific Investment Management Co., who have told clients there are still reasons to be worried .

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Read Wall Street’s Rising Euphoria May Spell Trouble for Stock Market on bloomberg.com

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