Dow at 1000- a good analysis:
Subject: "IDEA OF THE DAY"-Trading in&out for profits.
To: +NYraj (917 )
From: +IQBAL LATIF Jun 20 1997 4:05AM EST
Reply #963 of 963
NYRaj- May be this article is good - DOW at 10000.
What a Dow 10,000 Implies
Daily commentary updated for June 20, 1997
Ralph Acampora of Prudential Securities has justifiably earned a good reputation has a market forecaster. His Dow 7000 forecast a few years ago was among the most bullish on Wall Street, although even that proved too cautious. Now, Mr. Acampora is forecasting a Dow level of 10,000 by June of 1998. That would mean a gain of 28.5% over the next year.
The Fundamentals: What P/E's Would Go To
Mr. Acampora's forecasts are based largely on technical (chartist) considerations. The following is neither an endorsement nor criticism of his forecast, but is a look at what would be needed from a fundamental standpoint in order for the overall market to rise by 28.5% over the next year.
The S&P 500 is currently trading at 22.3 times trailing 12 month earnings. The Dow Industrials are trading at 20.5 time earnings. The vast majority of Wall Street firms are forecasting a 7% to 10% growth in earnings in 1997 and 1998, so a consensus forecast of about 9% in profit growth the next 12 months seems reasonable, if not a bit on the high side. In fact, Mr. Acampora's firm Prudential forecasts a similar profit outlook.
Therefore, if earnings grow 9% over the next 12 months, and the indices rise 28.5%, the p/e will rise. The math takes the p/e for the S&P 500 to 26.3 and to 24.2 for the Dow under this scenario.
Possible, but Indices Would be at Nosebleed Valuations
Is this possible? In a word, yes. Taken from the chartist perspective, it would mean a continued demand for stocks due to the long-term rally. From a fundamental perspective, it means that the economic, inflation, and interest rate outlook not only has to remain favorable, it probably has to improve. A 26.3 p/e for the S&P 500, however, is extremely high by historical standards, and a 24.2 for the Dow even higher. In fact, a long term chart will show that that Dow tracks closer to a 14 p/e and the S&P 500 to 17 or less. Thus, the indices will be at a 60% or greater premium to historical valuations. In the past, when the p/e on the S&P 500 has reached nosebleed levels of 25 or more, corrections have at times been severe. To sustain a p/e of 25, inflation and interest rates would have to be lower than at present, and the outlook for profit growth of close to 10% highly probable. Nothing can go wrong.
10,000 By 6/98 Leaves no Room for Error
In Briefing's view, it is therefore possible that the Dow will hit 10,000 in a year. However, that would probably mean that speculative demand has pushed stocks to a point where any negative developments are considered improbable if not impossible. Risks would be very high. In fact, if the S&P 500 p/e goes over 26 in this scenario, we quite frankly would advise extreme caution at that time, to put it mildly.
Over the past two year, stocks have managed to rise over 20% annually as profit growth has risen about 10%, and the S&P p/e multiple has risen by about 10% (from approximately 17 to 19.5 to 22). Another year of this is certainly possible. But if it does occur, it will place stocks at valuations that will raise risks to unacceptable levels. And if anything goes wrong this year, such as a generally rising inflation rate, then stocks are more likely to maintain their current p/e, and track earnings growth rather than for the Dow to hit 10,000. Anything seems possible on a day when the Dow is up 58 points, but it is worth considering what the unbounded enthusiasm actually implies. |
