Sunday, 20 February 2005

S&P 500 to end 2005 at 1300

Sam Stovall, chief investment strategist for Standard & Poor's, thinks that maybe 2005 won't be so bad. Some of his considerations are as follows:

  • Oil: A relatively warm weather has reduced the risk of higher oil prices.

  • Corporate profits: Earnings have exceeded expectations and it now looks as if fourth-quarter earnings will rise 22 percent and 2005 earnings will rise 9 percent.

  • Fed outlook: Weak payroll increases means that the Federal Reserve is likely to continue with its measured pace of interest rate hikes.

  • Yield curve: Although the yield curve has flattened, the spread between long and short term rates, 1.7 points at the time of his writing, is still more than 60 basis points above the average since 1971.

  • His conclusion:

    Even though rising interest rates, decelerating corporate earnings gains, and the aging of this bull market may cause equity returns to fall short of their long-term averages, S&P's Investment Policy Committee does not believe the U.S. equity markets are likely to end their bull runs in the near term.

    Why? Global economies are projected to grow between 2% and 7% in 2005, with the U.S. projected to post a 3.7% advance in real GDP. Corporate cash levels remain very high, in our opinion, with more than $600 billion on the books of companies in the S&P 500. In addition, it's estimated that corporations will repatriate between $100 billion to $200 billion in foreign earnings. This capital will likely induce managements to repurchase shares, raise dividend payouts, increase acquisition activity, or spur additional R&D investment.

    His end-2005 target for the S&P 500 is 1300, which provides a 7.3 percent full-year price appreciation.

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