Need to Know: ‘Euphoric’ investors trigger alarm bells over stock market rally

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If trade optimism is truly feeding these stock records, then get the confetti ready.

Reports that the U.S. may drop some China tariffs to seal a “phase one” deal are boosting stock futures on Tuesday. That’s a day after all three major U.S. indexes nailed record closes.

But Lori Calvasina, RBC Capital Markets’ head of U.S. equity strategy, is wary of those highs and offers five reasons why investors should be too, in our call of the day.

In a note to clients, she says she’s sticking to RBC’s year-end S&P 500 SPX, +0.37%  target of 2,950, even as the index pushes above 3,000. Here’s why:

1) “Euphoric” U.S. equity futures positioning among asset managers is nearing July 2019, September 2018 and January 2019 peaks that are in line with highs seen just before the global financial crisis. That means stocks could be vulnerable to bad news.

2) Valuations in the U.S. equity market are back to late-2017 highs, and Calvasina says improvement from here may be tough given the Federal Reserve is expected to pause on further interest rate cuts.

3) Earnings forecasts for 2020 are too high.

4) Stocks are already accounting for the benefits of a phase one trade deal, which Calvasina doubts would undo damage that’s been done to business confidence.

5) As of Nov. 4, the S&P 500 has rallied more than 30% from the December 2018 low. That’s similar to rallies seen off index lows in 2010, 2011 and 2016, and as her chart shows, each of those years had market pauses along the way:

“The new thought we offer this week is that we haven’t learned anything in the current reporting season that justifies euphoric positioning and peak valuations. Reporting season has been better than feared, but the overall tone around demand/macro, tariffs and cost savings all sounds very familiar – it’s what companies have been saying all year,” says Calvasina.

The market

Dow YM00, +0.23%, S&P ES00, +0.18%  and Nasdaq NQ00, +0.24%  futures are higher. European stocks SXXP, +0.00% are near four-year highs, and Asian markets also finished up.

The chart

Our chart comes from the World Gold Council. On Tuesday, the industry body reported the biggest exchange-traded fund inflows for gold in three years, due to accommodative monetary policies, safe-haven demand and investors chasing some big gains.

First column shows gold demand in Q32018, second shows Q32019

It’s been a strong year for gold GC00, -0.30%, which is up 17% so far this year, putting it on a par with the Dow industrials.

The buzz

Tuesday’s earnings list includes pharmaceutical groups Mylan MYL, +0.30%  and Allergan AGN, +0.29%, plus the first set of results from exercise equipment maker Peloton PTON, -1.52% (see preview).

Uber UBER, -0.92%  shares are stumbling after the ride-hailing service reported another mega loss. Shares of fast-food restaurant Shake Shack SHAK, +1.74%  are also sliding as same-store sales and its outlook missed forecasts.

The economy

Trade balance data will hit early, followed by the Markit services purchasing managers’ index, the ISM non-manufacturing index and job openings. There are also a lot of Fed speakers this week.

The stat

$1.8 million — That’s the cost of a single-dose drug developed by Bluebird Bio BLUE, -0.05% for a rare blood disorder that has plagued Sicilians for centuries.

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