Tepper says stocks could rise another 20%. Icahn says stocks are due for a big fall. Buffett says stocks are neither cheap nor expensive, their in the zone of reasonableness. And Schwartz says…
Who cares!
Let’s focus on the facts. Yes, the S&P 500 and Dow Jones are at record levels. But so are corporate earnings. If you buy stocks to participate in earning growth, shouldn’t markets be at all-time highs if earnings are also at all time-highs? I rest my case with this point.
Next. Consensus estimates are that earnings for the S&P 500 will rise about 12% next year. I have no clue if earnings will grow 12% in 2014 but even if they accelerate, they will once again reach record levels and market indices should rise in accordance. Keep it going.
Interest rates have moved up a little this year but are still incredibly low. If you are so inclined, you can buy a 10 year government bond and earn 2.7% a year (before taxes and inflation). That, my friends, is an awful return. Until good quality bonds offer me at least 6% a year, there is no comparison. Stocks win. But are we too optimistic?
Valuations are reasonable in context of history. The S&P 500 is trading at 15 times next year’s earnings. The S&P 500 would have to climb another 20% to trade at the average P/E since 1960. Thank you very much, I’ll take 20%. Even if profit growth for the S&P 500 came in flat next year, the S&P would still be valued at the average level of forward earnings since 1996. In other words, reasonably priced.
I’m not saying go out and by the index and nor should you go out and buy Twitter, Netflix or the high-flying sexy no-profit IPO of the month. But if you spend a reasonable amount of time researching, you’ll find lots of attractively priced equities with rising dividends and/or stock buybacks on both sides of the border that exist in the zone of reasonableness.
