As you know, Goldman recently released their 2018 year-ahead outlook for U.S. stocks.

The piece, called “rational exuberance”, is generally consistent with everyone else’s year-ahead outlook pieces for risk assets (Barclays was actually first with the “rational exuberance” title), but this being Goldman, it got the most attention.

Of course there’s something not quite right about the term “rational exuberance.” “Exuberance” implies at least a little bit of irrationality in most cases and there is most assuredly some irrationality inherent in being “exuberant” about an asset class that is stretched to historical extremes on all kinds of standard metrics.

But here’s the thing: assuming the ubiquitous “Goldilocks” narrative of decent global growth but still subdued inflation continues to be a reasonably accurate description of economic reality and assuming subdued inflation gives central banks the cover they need to keep the pace of normalization sufficiently gradual, there’s a plausible argument to be made that risk assets have further to run.

That, plus a rosy outlook for earnings growth, is the basis for the Street’s generally upbeat take on U.S. stocks headed into the new year. You can read more of the details on Goldman’s outlook in the first post linked above, but suffice to say these are their targets:

Our S&P 500 year-end forecasts are 2850 (2018), 3000 (2019), and 3100 (2020) for gains of 11%, 5%, and 3%.

That hinges on three things:

And if you want to know how this is “rational” exuberance as opposed to the infamous “irrational exuberance”, Goldman is happy to explain it to you but this chart sums it up (the idea is that the market doesn’t need rampant multiple expansion to hit the bank’s targets and thus the trajectory will not approximate the lead up to the tech bubble):