Goldman team sees ‘unsustainable surplus’ in parts of the US market

Photographer: Michael Nagle / Bloomberg

The corners of the US equity universe are showing signs of foam, but that should not endanger the broader market, Goldman Sachs Group Inc.

Very fast-growing multiple stocks “appear frothy” and the boom in specialty acquisition companies is one of several “signs of unsustainable surplus” in the US stock market, strategists, including David Kostin, wrote in a note Friday. The recent surge in negative earnings stocks is also at an all-time high, they said.

However, the aggregated stock market index trades at below-average historical valuations, taking into account interest rates on treasury bonds, corporate credits and cash, the strategists added.

“The pockets of the market recently seemed to show investor behavior consistent with bubble-like sentiment,” the team wrote. “But these excesses pose a low systemic risk to the broader market given their modest share of Market capitalization. “

With global stocks trading around record highs, investors are questioning the potential for future returns amid extensive valuations and signs of speculative behavior. The MSCI AC World Index is up 74% from its March low, with a growth share-heavy Nasdaq 100 Index at over 90%.

Goldman’s colleagues at Citigroup Inc. acknowledged that global equities are looking “increasingly frothy”, in a separate note Friday, but suggested valuations continue to lag previous “mega bubble” periods and risky assets could continue to rise.

“There will eventually be a real bear market, and it always is after a bubble,” wrote the Citi team, including Robert Buckland. “But markets may get more vibrant first.”

– With the help of Crystal Tse