Being critical over U.S. market movement is not new for Goldman Sachs. The investment bank has often warned investors in recent times when a sharp rally has been noticed on the market (read: After Goldman, DB Warns About S&P 500: Play Alternative ETFs).  

As we know, the Trump rally has offered the S&P 500-based ETF (SPY Quick QuoteSPY - Free Report) 10.4% gains (as of February 23, 2017), the Dow Jones-based ETF (DIA Quick QuoteDIA - Free Report) a whopping 13.3% return and the Nasdaq-100-based fund (QQQ Quick QuoteQQQ - Free Report) an 11% advancement since the election in November.

After such stupendous gains, many investors still believe that there is more room to this rally, thanks mainly to an improving economic backdrop and Trump’s promises for fiscal boost and deregulation. The fourth quarter’s GDP was decent at 1.9%. The Q4 earnings season has been better than the previous quarters and is on the way to be the highest in eight quarters. 

However, Goldman Sachs believes the opposite and expects a correction later. As per Goldman Sachs’ analyst David Kostin, “Cognitive dissonance exists in the U.S. stock market” as there seems to be little synchronization between the ground reality and investors’ hopes.

Goldman commented that the “hope” would push the index to 2,400 before “fear” taking it down to 2,300 by the end of this year. If 2,400 is the near-term possibility, the S&P 500 can see a 1.5% upside from the closing level on February 23, 2017.

Let’s explain why the bank has a bearish view on the U.S. market.

Inside Goldman’s Bearishness

As per the bank, there are negative earnings revisions from sell-side analysts. “Sell-side analysts have cut consensus 2017E adjusted EPS forecasts by 1% since the election and ‘hard’ macroeconomic data show only modest improvement” (read: Play Positive Surprise with These Sector ETFs).

Notably, U.S. economic growth slipped to 1.9% in Q4 from 3.5% in Q3. For the full year, the economy expanded 1.6%, marking the worst performance in five years and declining from 2.6% growth in 2015.

Secondly, Goldman believes that all of Trump’s pledges for fiscal reflation will take time to materialize. “Sell-side analysts appear hesitant to incorporate potential tax reform and deregulation into their estimates given elevated policy uncertainty,” as per Goldman. The bank does not see the beneficial impact of a likely tax overhaul before 2018.

The bank elucidates that positive revisions to aggregate S&P 500 EPS estimates happened just six times in the last 33 years from their starting point. So, chances of material upward revisions are unlikely.

Finally, the bank believes that the market is at "the point of maximum optimism." A large pool of investors is apparently ignoring relatively weaker corporate guidance and being over enthusiastic about the extent of tailwind from tax reforms. Survey revealed that “the bulls at 61.8 percent, near a 13-year high” (read: 3 ETFs to Benefit from Solid Insider Buying).

We also like to note that the Fed is indicating faster rate hikes this year on a gradual pickup in inflation, a healing job market and economic stabilization. If it happens in reality, the greenback will gain more strength and weigh on equities.  Lack of cheap dollar inflows may cause market disruptions.

S&P 500 Already Touched the Year-End Target

The S&P 500 index has already touched the average year-end target of 2,364 with a 5.5% uptick since December, as per Bloomberg. Barring 2017, the only year that the S&P 500 crossed strategists’ year-end target by February was 2012 since 1999.

Given this sort of hope-induced rally (not reality), doubts over the longevity of the ascent are justified. Probably this why, most analysts have not upgraded their year-end target despite an astounding stock performance in recent trading.

ETFs to Gain from This Warning

If you are a believer and follower of Goldman and other strategists who are bearish on the market now, you can play this warning by shorting the S&P 500 and investing in inverse ETFs like Short S&P500 ETF (SH Quick QuoteSH - Free Report) and Direxion Daily S&P 500 Bear 1x Shares ETF (SPDN Quick QuoteSPDN - Free Report) . But investors may not need to take such extreme routes and just park their money in defensive ETFs to benefit out of this situation.

WeatherStorm Forensic Accounting Long-Short ETF

The underlying index of the fund seeks to allocate capital to higher quality stocks at lucrative valuations while shorting poor quality stocks that offer a less compelling valuation.

WisdomTree Dynamic Long/Short U.S. Equity Fund

The fund looks to track long and short equity positions. The long positions include large- and mid-cap U.S. stocks meeting eligibility criteria including fundamental growth and value signals and volatility characteristics. The short positions take the largest 500 U.S. companies into consideration, designed to act as a market risk hedge (see all long/short ETFs here).

Reality Shares Divcon Dividend Defender ETF (DFND Quick QuoteDFND - Free Report)

The fund invests 75% of its portfolio in large-cap U.S. companies with the highest probability of raising their dividends within a year, based on their DIVCON dividend health scores.

Reality Shares DIVS ETF (DIVY Quick QuoteDIVY - Free Report)

This ETF is active and does not track a benchmark. It looks to deliver long-term capital gains on the basis of “growth of dividends, not stock price, of large cap companies” (read: SEC's New Rule May Boost Active ETFs).

Hull Tactical Fund ETF (HTUS Quick QuoteHTUS - Free Report)

The fund is actively managed in nature. It intends to achieve long-term growth from investments in the U.S. equity and Treasury markets, irrespective of market conditions (read: Hedge Your Portfolio Against Sell-Off With These ETFs).

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