The Fosbury Flop
Dividing the Nasdaq 100's 1962 by 25.19 produces a P/E ratio of 78. Can earnings grow at 78% or more? Not without a miracle. In the boom years of tech spending, 1998 through 2000, earnings at the tech companies in the S&P 500 index grew by an average of 14%. Taking Nasdaq 100 weighted actual earnings for 2000 and the weighted forecast numbers for 2001 and 2002, these 100 corporations have an average growth rate of 28%.
If the long-term earnings growth rate for tech stocks turns out to be around 20% -- roughly the midpoint of the above growth figures -- the price-to-growth ratio on the Nasdaq 100 is nearly 4.
That can't last. When the adjustment comes, don't be surprised if Nasdaq 100 stocks fall to trade at twice that 20% growth rate, or at a P/E ratio of 40. In that case, 40 times our 2001-02 average earnings of $25.19 would produce a Nasdaq 100 level of just over 1000, which is nearly 50% below the current level. If the wider Nasdaq Composite Index fell by 50%, it'd be sitting at 1110, well below the 1500 mark Detox once predicted.
When will we get to 1500? When the folly of the Fed's pump-priming shows up in an inflation rate that the market can't ignore. Inflation is already bobbing around five-year highs, going by the Cleveland Fed's inflation index, arguably the fairest measure, so the market already should have freaked. It hasn't yet, testifying to its willingness to bet everything on Greenspan's handling of the economy. When the Fed has been discredited, investors will have nothing left to base their optimism on. Then, the 1500 call will look bullish.
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