Excerpt of market comments from Briefing.com (this approximates
my personal opinion also):
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Longer-term comment:
The S&P 500 now trades at 34 times trailing as-reported earnings. That is very high considering that operating earnings rose about 6% in the fourth quarter, while as-reported earnings were near flat.
Yet, splits seems far more important at driving stock prices than earnings or valuation. The market is still in a speculative mood, where bad news is shouted down as unimportant. Raising the issues is heresy.
Investors are simply convinced that anything negative is temporary. Hence, even the widespread evidence that PC sales growth is slowing down is met with responses such as "its only due to Y2K concerns, and sales will pick up in a year again or so." Possibly true, but that might also mean that some stocks are overvalued. Yet, any dip is seen as an opportunity to get right back in.
In this environment, the market is likely to continue to push higher long-term until something dramatic undermines confidence. Unfortunately, that means a potential crash scenario. When? Perhaps not for years. Perhaps sooner. It is, of course, impossible to tell. But at P/E of 40 makes just as much sense as 34, and profits could easily rise 5% to 10% the next couple of years. That means the market could rise 10% to 20% per year.
At some point, however, when long-term assumptions change on either inflation or the economic/profit outlook, the math of a crash is a bit scary. If interest rates start picking up, or earnings turn down, a P/E of 17 is fully rational. That sounds hard to believe now, but it is not inconsistent with history. If that does happen, the market could lose 50%.
Long-term sentiment remains slightly bullish. No one in this market, however, should mislead himself as to the nature of the situation.
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