Reuters Business Report
Street Strategists Whistle Cautious Tune
By Per Jebsen
NEW YORK (Reuters) - Wall Street strategists, the dream merchants of the late 1990s bull market, have become
connoisseurs of gloom.
But a Reuters poll of 10 of Wall Street's top strategists this week still produced a median forecast for the Standard & Poor's
500 Index (CBOE:^SPX - News) to rise to 1,250 by the end of 2002 or some time next year.
That is scaled back from the last Reuters survey in March, when the
mid-range forecast was 1,338. But it would be a nine percent gain from
the S&P's 2001 close at 1,148 and would require a 24 percent rally from
Thursday's close of 1,006.
Chastened bulls pin their hopes on imminent earnings gains and economic
recovery.
Yet many of the pundits articulate a more conservative outlook than their
predictions would indicate.
"The market is still highly speculative," said Richard Bernstein, Merrill
Lynch & Co.'s chief strategist. "People should focus on capital
preservation...look at boring businesses...look away from mainstream tech
and hot stocks."
Bernstein has a 1,200 target for the S&P 500, but says stocks are overvalued according to the price-earnings ratio and its
projected growth rate.
The most bearish pundits refuse to rule out further pain for investors, even though the S&P 500 has fallen by one-third from its
early 2000 peak, and the tech-laden Nasdaq stock market has plunged 70 percent.
CORPORATE ROT
Indeed, after years of wonderful economic conditions that fueled the stock boom, investors must adjust expectations, according
to UBS Warburg strategist Ed Kerschner.
Merrill's Bernstein worries that some investors remain more concerned with missing a possible earnings surprise from a
technology company than with the potential for war between nuclear-armed India and Pakistan -- demonstrating the risk still
embedded in stock prices.
"There's an optimal combination of capital appreciation and capital preservation," he said. "The needle has been turned up too
high on capital appreciation."
A rising equity risk premium, the extra return investors require because of stock volatility, is limiting the market, said Tobias
Levkovich at Citigroup's Salomon Smith Barney unit.
"There is this sense of corporate rot," said Levkovich, who last week cut his S&P 500 target to a range of 1,200-1,250 from a
range of 1,300-1,350.
"Back in February, it was Enron, but now it's Tyco, Imclone, Dynegy," he said. "It makes investors a little less willing to buy
stocks."
Another fear is that even an improving economy would not lift stocks for long because the Federal Reserve would tighten
interest rates to curb inflationary pressures, according to Banc of America strategist Tom McManus.
PROFITS TO THE RESCUE?
"There are a lot of things that are nagging the market right now," said Charlie Reinhard, a senior U.S. investment strategist for
Lehman Brothers.
These factors include a softer dollar, corporate accounting practices and governance and oil prices. But Reinhard says a profits
recovery will be the most important theme between now and the end of the year.
He expects corporate profits to show a year-on-year gain in the current quarter, their first since the fourth quarter of 2000, and
to continue the recovery in the second half of this year and throughout next year.
Last year's multiple interest rate cuts by the Federal Reserve have not yet had their full effect on consumer spending, he said,
and investors should consider cyclical sectors such as consumer discretionary goods.
Morgan Stanley chief U.S. strategist Steve Galbraith says stock prices need not just improved profits but also more confidence
in reported earnings in order to rise.
"What investors need to see, and soon, is the whites of the eyes of corporate earnings growth," he said.
THE BULLISH CASE
Goldman Sachs Group's chief investment strategist Abby Joseph Cohen says investors' fears are overdone and that stocks are
likely to rise within the next six to 12 months to the S&P 500's fair value of 1,300.
She says the basics of economic and corporate performance are increasingly sound, companies have done an effective job of
reducing investors' expectations, and the high level of accounting adjustments may soon decline.
Valuation models based on price/earnings ratios that suggest stocks are overpriced ignore factors such as inflation and interest
rates. Moreover, the weakening of the U.S. dollar may boost exports and profits while encouraging structural reforms in other
countries, she said.
For pessimists, whose dire predictions a year ago have been exceeded by the slump, the time is not yet ripe for confidence.
"Because earnings have eroded so dramatically, people are speculating that there has to be an earnings rebound...a very
substantial one," said Merrill's Bernstein.
"Earnings are improving, but they're not improving as rapidly or to the magnitude of the consensus view," he said. |
