This Rally in Stocks is Doomed: Goldman

Hoped-for tax reform & infrastructure spending will disappoint.

Stocks have surged to new highs since the election, from already very lofty levels, on the theory that the Trump Administration and Congress would create policies that would pile enormous benefits on Corporate America – and do so pronto. This includes, as President Trump called it, a “phenomenal tax plan,” deregulation for Wall Street and other sectors, and additional government spending, particularly a $1-trillion boost to infrastructure spending and some plus-sized moolah for the military.

Now the markets are counting on it. Stocks have soared. And everyone is happy. So why is Goldman Sachs dissing the rally with increasing intensity on a near-weekly basis?

Goldman shares have surged 58% since early October when it became clear to the markets that Trump had a chance. Some of its former executives are now dutifully holding down key positions in the Trump administration. Markets are expecting that all manner of goodies will rain down upon Goldman and the broader Wall Street community.

But Goldman’s analysts are worried about this market enthusiasm because those goodies may not show up, or show up late and in watered-down form once Congress gets through with them, if it gets through with them at all. And for any disappointment, there will be a price to pay….

Because tax reform may turn into a dud, according to Goldman economists led by Alec Phillips, in a note today.

The problem is the repeal of the Affordable Care Act. Republican lawmakers disagree among each other on whether to repeal it first and replace it later, or modify it instead, what to replace it with, or how to modify it. So this is going to be the Congressional mess that is typical for large legislative changes, rather than a quick thing. And it will drag out and get more complicated and more layered and consume the attention of the lawmakers and focus the attention of the American public.

“This process is likely to take longer than expected, which is likely to delay the upcoming debate over tax reform,” the Goldman economists wrote in the note cited by Bloomberg. “The difficulty the Republican majority is having addressing a key political priority suggests that lawmakers might ultimately need to scale back their ambitions in other areas as well, such as tax reform.”

But quick and substantive corporate tax reform is what the markets are counting on when they pushed the S&P index up 10% since the election. Now the efforts to deal with Obamacare may push corporate tax reform on the back burner, they said. And that would put those price gains at risk.

Yesterday, Goldman’s chief US equity strategist David Kostin warned in a note cited by Bloomberg about the consequences of such a disappointment: “Financial market reconciliation lies ahead,” he wrote.

According to his math, 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.”

The note points out that corporate earnings estimates for 2017 have actually been cut by 1% since November 8, even as the S&P 500 index has jumped 10%.

Goldman isn’t the only bank issuing warnings about the increasing riskiness of this bet. On February 13, after stocks had surged for three days straight in response to Trumps mere suggestion of a massive corporate tax overhaul, Cowen & Co analyst Chris Krueger warned that bulls are going to be disappointed with what the White House will put forward. It won’t be a substantive road map for Congress to follow.

It comes after Goldman economists, led by Alec Phillips, had warned in early February:

“Following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration.

“One month into the year, the balance of risks is somewhat less positive in our view.”

“The recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story.”

This makes three weeks of regular warnings from Goldman and other banks that stocks have soared on a wing and prayer, with investors hoping for, and pricing in, something that may be forthcoming only belatedly, if at all, and only in much watered down form, and perhaps without much effect on corporate earnings after all, especially since the US corporate tax code, as it is, already provides companies countless ways to shelter their income.

So are stocks grounded in some sort of new reality? LOL. Read…  S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  46 comments for “This Rally in Stocks is Doomed: Goldman

  1. HT says:

    Goldman must be short BIG TIME

    • NotSoSure says:

      Or not. As a reader of ZeroHedge, the later likes to say how Goldman’s recommendations often reflects what they want their clients to do so they can profit later on particularly in FX. ZeroHedge though has no problem trusting Goldman’s recommendation when the later is bearish on stocks. Of course, tons of people that are short have been taken through the cleaner.

      As they say: “Buy the rumor, sell the news”. Trump can keep the rumor going by promising a sweeter deal in the future.

      • Maximus Minimus says:

        This one is probably a no-brainer: how would a border tax or any tax on imports, and replacement of cheap foreign labor increase profits? And government borrowing without printing should lead to increased interest rates. Still, exact timing is everything, and you can influence the timing when you can nudge the market like Golden Sacks.

        • OutLookingIn says:

          Newly instituted taxes and unforeseen consequences. Age old corruption in the United States, utilizing law making and state power for your own benefit.
          The whiskey making business flourished until 1791, when the federal government decided to tax it to pay for the revolutionary war.
          The people revolted against this government measure, often turning away the excise collectors by force. Most local legislators saw this move by the federal government as usurping state powers.
          By 1794 George Washington called out the militia to put down the rebellion. He called out more troops to put down the whiskey rebellion, than he used to defeat the British!
          Ironically, George Washington started making his own whiskey at Mount Vernon and by 1799 when he died, was the biggest whiskey producer in the United States.
          There are no co-incidences in politics.

        • Kent says:

          “And government borrowing without printing should lead to increased interest rates.”

          This is a misunderstanding of how the federal monetary system works. The government spends money into the economy before borrowing it back. So the money is already there when it needs to borrow it back. It’s not competing for pre-existing money.

        • Jessy James says:

          Even more ridiculous is the MSM mentaility that believes gold falls when interest rates go up. In reality, this is counter-intuitive. If the Fed raises rates, it is because they waited too long and the market overheated. This is all good for gold. Selling consumer discretionary equities and buying miners is exactly what Goldman is doing…

      • Thorny Rose says:

        He now says tax reform will follow ACA. Ok LOL. The Republicans have very few balls left as the general public on either side is letting them know that ACA repeal is going to cost them. So with no definite ACA plan there will be no tax plan. Progress??

        I dont think Goldman is out to lunch here at all. His wall has no funding there is no budget proposal yet etc etc.

        Trump is just playing golf and helping the Legal industry garner more fee’s. Hope and change LOL.

        Here is a nice synopsis of what Trump actually is — from Bloomberg editorial on WhiteHouse 101:

        “President Donald Trump’s rocky start should come as no surprise. He has no experience in government or large organizations — his company is a small family office that employs a few dozen people. Before finding success through television and licensing deals, his career was defined by a series of failures and bankruptcies. The image he has cultivated for himself as the CEO of a global empire is even more spurious than a degree from Trump University.”

        Oh and add his SAG pension for working in Hollywood which is about 120k a year. The ultimate insider LOL. No word on the so called billionaire giving that back yet LOL!

      • Copernicus says:

        Your comment about but the rumour..,
        Reminded me of the insight, “never get married to a woman you wouldn’t want to divorce.”
        So I thank you.
        How does this play out in the minds eye?
        …Trump’s response to a falling market…
        Calm yet desisive?

    • Intosh says:

      LOL Exactly my thought the entire time reading this piece.

  2. David says:

    Couldn’t agree more. Twenty trillion in debt and up to 140 trillion in unfunded liabilities. Tax breaks for all. Give me a break. The numbers will never work without massive spending cuts. Thanks Donald you paid for our new kitchen and slightly used truck. I sold out of the market yesterday. Ill wait for the heartbreak of the new comers and buy back in. Sleep tight.

    • Bob says:

      You’ve converted fictitious fleeting stock value for hard assets – very nice move.

    • Sonomamendo Steve says:

      What if (long term) one looks at PUBLIC equity as being a vanishing option for less wealthy investors who can’t get into private equity?
      As in RARE like gold or something? Too out of the box?

  3. Camerons says:

    Back in 2012 when Japanese PM Abe came to power, he launched a new economic policy. The ‘three arrows’ of this policy were
    1) to print money and take interest rates down to zero and beyond
    2) to increase government spending to pump-prime the economy in traditional Keynesian-style; and
    3) to introduce structural reforms i.e. labor and market deregulation. A sharp cut in corporate taxes and a special sales tax.
    When Japan began the new policy the global economy was far stronger than it is currently, thus Japan was supported indirectly by external conditions.
    Abenomics has failed spectacularly.

    • Wolf Richter says:

      But the Nikkei has more than doubled since he first made those promises :-]

      • Maximus Minimus says:

        Not because of profits or booming exports. BoJ buying stocks. What could go wrong? /cliche

        • MC says:

          Who cares? I made some money out of it and that is all that matters.
          As I completely abandoned China as an investment just before the stock market crash (and they are not seeing me again anytime soon), I’ve shifted to South Korea and Japan.
          I suggest people looking for a different way to gamble/speculate to look into KTOP 30 and KOSPI and to take another different look at Nikkei 225 and TOPIX.

          As salesmen of old said: “Our loss, your gain”.

        • Wolf Richter says:

          Yes. My comment was utter sarcasm.

  4. william says:

    In the past 17 years, there have been US stock market indexes dropping over 30%. Although it can take over a year from an index peak to get to a 30% drop. This is what I’m waiting for before re-entering the stock market.

  5. prepalaw says:

    Buffet bought Apple heavily in December. He knows that 2017 earnings projections are poor. Why would he buy – because Apple has 95% of its earnings surplus overseas. A small 10% repatriotation tax would move the funds legally to the USA for stock buybacks, dividends and other goodies.

    Good chance that this aspect of “tax reform” will be legislated. I own no Apple stock.

    • NotSoSure says:

      On top of that Buffet is well aware that Muppets have no problem whatsoever coming up with money to buy Apple products, but according to polls, they’ll have a problem coming up with 1000 dollars to pay medical bills.

      Trump does not need to make America Great Again, with Muppets like these, Murica is already Great.

    • Meme Imfurst says:

      Give me a break. Buffet broadcasts on every sad-ass media channel when he buys, NOT when he sells. What a fools game following any of them. They know full well you will send the stock price up or keep it solid while the unload it on the greater fool theory.

      You won’t find out he or Goldman took profits until you are down 30% and the quarterly comes out.

      Don’t forget he was ‘given’ Wells Fargo (thanks Obuma), and a direct link to the cheap window of the FED, a Politians’ best friend. If he did buy for the company, it is NOT for the toys, but Apple Pay. Two and two, make…

    • Tang says:

      Money overseas? Oh cannot bring back because of high taxes. Oh who knows? Perfect isn’t? And Saudis claims there are billions and billions barrels of oil under their sands. And a Chinese forestry company claims in a certain part of China their company had over millions of trees planted. And a Japanese fishery co. claims they have millions of tunas in a certain part of Pacific ocean. And they feel rich.

  6. Meme Imfurst says:

    Affordable Care Act or lower taxes, you choose, can’t have both with a 20 trillion dollar deficit and growing (at least those are the numbers we are told) not to mention trying to support a government pension and healthcare system that a Saudi king could only dream of.

    Goldman as so many do, only discuss one aspect, not the whole banana.

    Nothing can be taken in isolation, everything is now financially connected. Pensions everywhere are failing, Connecticut is now in the ‘can’t afford it’ group even with sky high taxes. Who is next ….New Jersey? NY? How do you cut taxes and still provide cake?

    Defund 70% of the phony NGOs might be a beginning, that is 22 billion right there.

    Don’t get me wrong, this country can not be health if the people are sick and poor too.

    • Petunia says:

      Do you honestly think that a country that would spend 20T it doesn’t have, wouldn’t spend 50T it doesn’t have? The answer, just in case you really don’t know, is yes they would. What scares GS is that they have lost control of the scale of the scamming.

      • Kent says:

        Did spending 20T we didn’t have cause a problem? Are tax rates shooting up? If not, why would spending 50T be a problem?

        • Petunia says:

          The problem isn’t the 50T number, it is the scale of the financial engineering needed to create and move it. It’s a perversion of the drug dealers dilemma, how do I move the money. GS’s problem is that they never anticipated the possibilities of having to place this much bad debt. The wealth doesn’t exists to absorb it.

  7. Uncle Frank says:

    The Trump administration wants to overhaul the tax code by August, Treasury Secretary Steven Mnuchin said Thursday, laying out an aggressive timetable in his first significant public comments since taking office last week.

    “Our economic agenda, the No. 1 issue is growth, and the first most important thing that will impact growth is a tax plan,” Mnuchin said in an interview with CNBC.

    • Wolf Richter says:

      Ha, just out… Trump, speaking alongside Treasury Secretary Mnuchin, said a tax reform plan was “well finalized” but will only be released after a successful repeal of the Affordable Care Act.

    • TheDona says:

      Would be great if the tax plan was similar to FDR’s in 1944: 94% income tax on top earners, which would be 2.5 Mil in todays dollars. No wonder all the Billionaires are buying bunkers in New Zealand. Somethings got to give.

    • Smingles says:

      Yeah… and this comes, what, a week or two after Trump said expect something very big, and very awesome on taxes in the near future?

      And now it’s August… at the earliest… with many saying that seems very unlikely.

      And John Boehner, now that he’s not an eleected politician, speaks his mind and says Republicans will not repeal and replace, and the ACA/Obamacare/Romneycare will have minor tweaks.

      And infrastructure plan being moved to 2018…

      Wow. So great. Can’t you feel it?

  8. Kasadour says:

    Pardon me if this has been mentioned in the comments, but Trump issued an EO the day after he was sworn in regarding the most unpopular aspect of ACA, which takes the teeth out of ACA pretty much- the mandate requiring health insurance or pay a fine (a tax). From what I’ve read the IRS has been instructed not to enforce this part of ACA. The other aspects of ACA – the mandate on pre-existing conditions and subsidies, remains intact.

    • Kent says:

      All true. Trump has already effectively killed the ACA without saying such. Without any obligation for the young and healthy to buy-in, ACA is a disaster for insurance companies. Expect them all to bail out next year.

      Trump has to do something quickly before the newly uninsured blame him and the Republican Party.

    • Marty says:

      Well, this EO is good, but not as good as it sounds. The penalty/tax for not having health insurance had NO TEETH FOR COLLECTION. The only way the gov’t could get that money is if a person without insurance also had a tax refund coming. In a few years, it would have gotten around how to dodge the tax–just never give Uncle more withholding than you need to. This is, of course, a rule that most “sophisticated” taxpayers always followed but by and large the middle class couldn’t get into their thick heads. They just LOVED getting a big fat refund in March that they could blow on a vacation. Go figure.

      • harvey says:

        It can be said that this mandate has a potential to foster an organized tax dodge theme by the massive lower middle class folks of middle america. Once being legitimized, could cost the govt. a lot more trouble down the road. It was poorly enforced by the Obama administration since Libs all think things should just work in the la la land, does not count in the fact that most young people do not like to pay for older and sicker people.

  9. TheDona says:


    During the 1920s, the U.S. stock market underwent rapid expansion, reaching its peak in August 1929, after a period of wild speculation. By then, production had already declined and unemployment had risen, leaving stocks in great excess of their real value. Among the other causes of the eventual market collapse were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank loans that could not be liquidated.

    “History repeats itself first as tragedy then as farce” Marx

  10. R cohn says:

    Currently ,the “effective” corporate tax rate is %28.Supposedly,the proposal by the House is to lower this “effective” rate to%24,while Trump’s will lower it to %19.
    Top individual tax rates supposedly will come down from %39.6 to %33.Ironically single earners from about $110,000 to $190,000 increase will see increases in their taxes under the rumored Trump proposals.

    There are a number of Republican Congressman and Senators who are very concerned about the budget. deficit.It is unlikely that the Trump administration is going to be able to pass any large infrastructure spending programs without commensurate spending cuts.

    So if the tax cuts end up being closer to the House’s rumored proposal and there is little additional infrastructure spending,it is probable that the stock market has vastly overestimated any benefits from Trumps spending and tax changes.

    Added to this is the probability that any budget and tax changes will not happen until 2018

    • Kent says:

      “Ironically single earners from about $110,000 to $190,000 increase will see increases in their taxes under the rumored Trump proposals.”

      More gutting of the middle class.

      • TheDona says:

        Because that is erroneously considered upper middle class and doing well.

        • harvey says:

          Good luck getting them to pay anything, those are the ones that is living by the coasts and coined the term “deplorables”. Trump just purged their love of cheap labor by kicking out all the illegals, think those upper middle class folks wants to pay the higher price for the WWC guy who sits on his coach in middle america? Welcome to class warfare there…

    • Marty says:

      “There are a number of Republican Congressman and Senators who are very concerned about the budget. deficit.”

      Ja, ja, ja, jo, jo, jo, tee hee hee. Stop it, will ya? Ja, ja, ja, jo, jo, jo, tee hee hee. I can’t catch my breath…

  11. Smingles says:

    “Cowen & Co analyst Chris Krueger warned that bulls are going to be disappointed with what the White House will put forward. It won’t be a substantive road map for Congress to follow.”

    The guy can’t put together a proper sentence, and his “plans” are vague junk with lots of stupendous adjectives attached.

    Everything is going to be the biggest, best thing ever, and if you disagree, you’re fake news. The President of the United States actually talks like this.

  12. beadblonde says:

    I am told that revenue doesn’t matter and that’s proven true. Earnings don’t matter because the accounting is complicated. Results don’t matter, either. Stock selection doesn’t matter because everybody is going to the index funds. Let’s just enjoy the wealth effect.

    Multiples to the moon! The Swiss are printing and buying!

  13. Obey The Constitution says:

    How can Trump tell them to ignore the law with an executive order? I voted for him as president, not dictator. Please someone explain to me how an executive order can override a law? I thought it takes congress and the president to override a law. I don’t like the way this is going, very disappointed in the way the country is going!!!

    • TheDona says:

      Obamacare was declared a tax and not a mandate by the Supreme Court.
      Read the history of Executive Order. Started with Washington. Abe had the most famous. FDR had 3,522!

  14. Tom kauser says:

    Echo chamber

  15. Blip says:

    Wouldn’t it be nice if you could wake up Monday morning, flash a blip across the internet, proclaiming to the world your worth $100Billion. there are people who have been doing that for a long time now. When markets were free, the blips had to match with real worth, but that has all changed today. The blips are even evolving like crypto-currency. Just blips on a screen and the world actually believe it really means something. they believe it because they flash their own blips and convinced others to work, save, and cultivate their own blips. people actually check on their blips daily, looking at their PCs and smartphones. blips flashing here blips flashing there and it really means nothing but everything. if i live long enough to see “the great poker call” and the blips on screen have to pony up real asset to equate the value they say they are worth – well gee – won’t that just be a hell of crazy thing to see unfold. then again, it is just blips on a screen.

Comments are closed.