Tuesday stock market forecast

Posted: hmax On: 04.06.2017

In the world of investing, no phenomenon is more remarkable than the tendency of Wall Street's brilliant, richly bonused prognosticators to make totally wrongheaded forecasts for stocks.

Here's the typical sell these days: Start with sober, logical-sounding parsing of numbers and trends that point to danger ahead, but then draw the familiar, and absolutely opposite, conclusion—this aging bull will just keep roaring! In a CNBC interview on Tuesday, Peter Oppenheim noted "the fundamental peaking of growth momentum" and cautioned that the Trump bump has "overpriced the ability of the administration to push through some of the things the market is priced for. At that point, his portrait of a severely stretched, overpriced market made perfect sense.

tuesday stock market forecast

But then Oppenheim veered to a confounding conclusion: I think that will probably continue for some time. Now don't get me wrong. Oppenheim's analysis is excellent and his warnings are well founded. But with all those caveats, how can he and his Wall Street brethren remain so doggedly optimistic? At today's elevated prices, the market math contradicts Wall Street's sunny outlook with three possible scenarios, that are best illustrated by popular songs with divergent themes. The first is what I'll call the "Wall Street fantasy" outcome recalling the inspirational standard from Man of La Mancha , "The Impossible Dream.

Wall Street Is Crooning "The Impossible Dream". As Oppenheim acknowledges, equity prices are rich.

The price-to-earnings multiple is a lofty Delivering high returns from this plateau requires super-charged earnings growth, for two reasons. Second, if investors are expecting returns even in the high-single digits, they're automatically saying that the equity cost of capital, represented by the gains they're expecting, are also high.

A high cost of capital requires PEs that are low to moderate so that investors are getting a lot of dividends and reinvested profits for each dollar they pay for a stock.

tuesday stock market forecast

If the cost of capital is high, and so are PEs, multiples must drop sharply going forward. Under those conditions, only a rapid, exceptional expansion in profits can produce high returns.

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To see how fast earnings must wax, let's use a simple example. That's no exaggeration, since pension funds frequently predict equity returns that big. We'll also assume all dividends are reinvested in extra shares. That doesn't sound so difficult. It's a pretty, stirring refrain. But it's a double, Don Quixote fantasy, that's both a dream and impossible. The Road to Mediocrity Could Be The Market's Future.

Therefore, the cost of capital might be far lower. It may be that investors believe that the world has changed, that US stocks are now a slow-growth, low-risk, low-return, dull but stable place. In that case, the folks will be satisfied with relatively puny returns, anchored by a plodding, slow-moving economy. Bolstering the "low expectations" theory is today's PE of almost If that's the right number, and that extra-high multiple remains a constant, then the cost of capital is the inverse of the PE.

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The return comes in three equal parts: Unfortunately, it's highly unlikely that one of the three pillars listed above—profit growth—will fully deliver. Going forward, he says, it's probable that profits expand at a slower-than-normal pace. So here's a more realistic prediction: Relative to Wall Street's raging bull market hype , that's getting nowhere.

Beware the "Awful Letdown". It can't be overstressed that earnings have been growing faster than the economy for five decades and sit at all-time highs vs.

GDP, revenues, and shareholder's equity. The trend not only can't last, it's likely to reverse. And that's the anatomy of the disaster scenario. Put simply, they remain totally flat in "real terms.

tuesday stock market forecast

That's a highly plausible outcome because it would simply obey economic gravity: Profits would decline to a more normal level in relation to such measures as national income. In this example, investors are still using dividends to buy more shares at declining prices.

Even with extra shares bought with dividends, investors would suffer annual losses of 2. But then in , new investors would fare far better. That's indeed an awful letdown. The most logical projection is for low-single digit returns over the next decade. Crowing and crooning that the bull market will keep roaring is Wall Street bull. Etsy Is Reorganizing Its Workforce, Which Includes More Layoffs. Fortune eBay Promises to Match Prices Against Amazon, Walmart, and More.

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