Analysts: Investors at peak optimism

Investor optimism is fast approaching its peak, according to equity analysts and economists who are sounding alarms on financial shares as well as the Trump bump.

Among stocks from JPMorgan to Citigroup, downgrades have outnumbered upgrades by a margin of almost 2 to 1 since the election, according to analyst recommendations. That’s a deterioration from the previous three months, when the downgrade-upgrade ratio sat at 1.5 to 1.

Analyst sentiment is souring as the KBW Bank Index has surged 29 percent since the election, lifting valuations to the highest since the aftermath of the global financial crisis. While lenders are well positioned to benefit from higher interest rates and President Trump’s policies, the pace of gains may have gone too far too fast, analysts said.

The advance in share prices has pushed banks’ implied cost of equity, or expected long-term return, to below 10 percent, a level that’s usually associated with negative share returns over the next six months, Citigroup’s Keith Horowitz wrote in a recent note.

The caution goes against investors who are betting the bank rally will last. Since Trump’s election, almost $10 billion of fresh money has flown to exchange-traded funds that buy financial shares, the most among 12 largest ETF sectors.

Earlier last week, Goldman Sachs said the surge in confidence following Donald Trump’s November victory could be reaching an inflection point.

Investors counting on tax cuts and an economic boom to fuel a surge in corporate profits are getting ahead of themselves, according to the bank.

“Financial market reconciliation lies ahead,” David Kostin, Goldman’s chief US equity strategist, wrote in a note. “[The] S&P 500 Index will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.”

Kostin and his team pointed out that while corporate earnings estimates for 2017 have fallen by 1 percent since the election, the S&P has surged 10 percent. Something has to give, they say.

The average year-end price target for the S&P 500 on Wall Street is 2,364, according to reports. That’s right where the index is trading now.