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Strategies & Market Trends : Z Best Place to Talk Stocks

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To: Beachside Bill who wrote (38913)	3/15/2002 8:13:33 AM
From: Kelvin Taylor	Read Replies (1) of 53068

Good article Bill. are are stocks still overvalued? "At the end of February investors were paying $29 for every $1 of earnings generated last year by the companies of the S&P 500. If you go by the thumbnail valuation technique known as the Fed model (divide the next year's projected earnings by the yield on a ten-year Treasury note to get the "right" price), that implies that they're expecting earnings to grow 39% this year. Now there surely is room for an earnings bounceback after such a dismal 2001, and the superstars of the S&P 500 probably can be expected to outperform America's corporations as a whole. But 39% is a lot more than 6% average annual profit growth. What this means is that, after the pain of a punctured speculative bubble, the next blow may be the realization that profits just aren't going to grow as fast as they did in the 1990s. There's no telling how investors will react, but at 6% earnings growth and current low interest rates, the P/E of the S&P 500 should be about 22. As for whether the economy can survive profit-starved CEOs and crestfallen investors--well, it survived 2001, didn't it?

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