Bloomberg article referencing QCOM's P/E:
Low Bond Yields May Boost Shares: U.S. Stocks Outlook
New York, July 24 (Bloomberg) -- The rally that propelled major U.S. stock indexes to records stalled this week, even as second-quarter earnings came in better than expected.
The reason: Federal Reserve Chairman Alan Greenspan suggested Thursday that the U.S. economy may be growing too quickly, and that any signs inflation is likely to accelerate would force the Fed to raise interest rates.
Still, many investors expect borrowing costs to fall by year- end -- and they're buying shares. ''I think bond yields are moving lower, and that will be a positive for stocks,'' said Howard Kornblue, a money manager for Phoenix-based Pilgrim Capital Corp. which oversees $7.4 billion. He added to holdings in Tricon Global Restaurants Inc., Aflac Inc., Varco International Inc. and Merck & Co. in recent days.
Stocks fell this week because investors are less willing to pay high price-earnings multiples as interest rates rise. The future earnings stream of these companies becomes worth less relative to the risk-free return on Treasuries.
The market, measured by the Standard & Poor's 500, is trading at the highest P/E levels in decades. And the star performers carry far higher multiples.
Take Qualcomm Inc., the biggest gainer in the Standard & Poor's 500 this year -- up 494 percent, compared with 10.4 percent for the S&P 500. The maker of telephone equipment trades at 65 times expected 1999 earnings. Microsoft Corp., the most highly valued stock in the world, trades at 58 times expected earnings.
Earnings aren't expanding fast enough to warrant higher P/Es, strategists say. To get a boost, the market needs lower interest rates.
Anticipating Lower Yields
Neal Soss, chief economist at Credit Suisse First Boston, expects the yield on the 30-year bond to fall to 5.5 percent in the months after the next Fed meeting on Aug. 24. Central bank policy-makers last raised official interest rates a quarter- percentage point on June 30. ''I would not be surprised by one more tightening, then that's it for the year,'' said Soss.
This week, though, the specter of rising rates sent major indexes lower. The Nasdaq Composite Index fell 6 percent, its biggest weekly drop since early October, when investors were concerned about a global economic slowdown,.
The Standard & Poor's 500 Index lost 4.4 percent, and the Dow Jones Industrial Average declined 2.7 percent. All three had set records last Friday.
The rout came although 65 percent of the 327 S&P 500 companies that have reported earnings surpassed analysts' expectations, according to First Call Corp.
The average forecast for year-over-year earnings growth has risen to 13.7 percent from the 11.2 percent expected a week ago.
Declines
Still, earnings gains often weren't enough for investors.
Citigroup Inc., for example, fell 3.8 percent in the last five days, even though the biggest U.S. financial services company reported a 21 percent rise in second-quarter profit. ''The market must understand just how strong earnings and cash flow growth was in the second quarter, not just for the financial sector but the overall market,'' said Bill Rubin, senior portfolio manager at Keefe Managers Inc., a hedge fund which oversees $500 million, mostly in banks. And there should be a ''realization that the second half will be even better.''
Rubin is bullish on stocks for the next 12 months. Keefe Managers has been buying Citicorp put options as a hedge against declines on the stock it owns and call options on Bank of America Corp. to buy more stock if those shares rise.
Enthusiasm Wanes
Investors were particularly disenchanted with computer- related companies this week, after several of the largest warned of slowing growth as they reported earnings.
Microsoft Corp. reported fiscal fourth-quarter profit jumped 62 percent to 40 cents a share, beating estimates. Still, the world's biggest software maker warned revenue growth will decline in fiscal 2000 because of slowing personal computer demand and uncertainty surrounding the Year 2000 bug.
Microsoft fell almost 10 percent.
International Business Machines Corp. also declined, losing 8.3 percent for the week. IBM told analysts not to raise their earnings estimates for coming quarters, as companies may slow computer purchases because of Year 2000 software problems.
Next week, a pair of government economic reports will offer clues on whether the U.S. economy's growth is slowing. A report on June durable good orders will come Wednesday, followed the next day by a preliminary estimate of second-quarter gross domestic product.
Investors will also pay attention to the question-and-answer session when Greenspan repeats his testimony on the economy before the Senate Banking Committee on Wednesday.
One money manager was pessimistic about the outlook for stocks if only because of investor complacency. ''Everyone acts like the market will not go bad, but we could get a few bad days and just like last time be down 10 to 20 percent before you know what happened,'' said Joe Williams, who helps manage $9 billion at Commerce Bank in Kansas City, Missouri. ''We're the most negative we have been in five or six years.''
The Dow industrials fell 19.2 percent between July 17 and Aug. 31 last year. The latter part of that rout was sparked by Russia's currency devaluation and debt default, which prompted investors to shun risk.
Favorable Environment
For now, though, the economy remains extraordinarily favorable for stocks, said John Zimmerman, senior investment strategist at St. Louis-based Bank of America Investment Management, which oversees $120 billion for high net-worth clients. ''Earnings per share are still going to grow, and there's no reason to expect P/E multiples to contract,'' said Zimmerman, who expects a 5 percent gain in the S&P 500 between now and year-end. ''The risk of an overheating of the economy is out there.
There's little compelling evidence the economy and consumer spending is decelerating,'' said Federal Reserve Bank of Richmond President Al Broaddus in a speech to the West Virginia Bankers Association in White Sulphur Springs, West Virginia.
Zimmerman likes drug stocks, consumer companies such as Gillette Co., Bestfoods and Tyson Foods Inc., and some computer- related shares, including BMC Software Inc. In addition, ''we just initiated a position on America Online Inc.'' Bank of America Investment Management's portfolios gained 39.1 percent last year, compared with 28.8 percent for the S&P 500, Zimmerman said.
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