While some commentators (like Grantham and Allmon) are descively bearish, other observers have a much more upbeat viewpoint. Dr. Ed Yardeni of Prudential Financial is one of them.
Unlike some of the Perma-Bulls and partisan cheerleaders, Yardeni uses rigorous economic models. He may not always be correct in his forecasts (who is?), but at least you know you’re getting an intellectually honest analysis. So today, we present the flipside of yesterday’s valuation critique:
JANUARY 7 — I am particularly encouraged by the mounting signs pointing to the emergence of a powerful global synchronized boom, which should be very good for profits. Materials, energy, and industrials are the sectors that should benefit most from a global economic boom.
If the market’s [forward] P/E valuation multiple remains at 17.5, which was the reading in December, and forward earnings rises to $65 and to $72 by the end of 2004 and 2005, respectively, then the S&P 500 would rise to 1137 and 1260. I happen to believe that the multiple could expand to 20 this year, and possibly remain at this admittedly lofty level in 2005. If so, then the S&P 500 would rise even more impressively to 1300 this year and 1440 next year.
A boom in the U.S. would obviously increase the odds that my target scenario will be on target. A global boom would put icing on the cake. According to my trusty CRB price index, the global economy is on a tear. Last year, this index soared 24% to the best reading since 1995. The metals component of the index rose 47% last year.
— Ed Yardeni, Chief Investment Strategist
A couple of observations: First, Yardeni uses forward P/Es as his basis for valuation. Its noteworthy that forward P/Es are estimates, not actual hard numbers. Analysts have tended to be over optimistic generally. Second, as a strategist I appreciate how the good Doctor uses a number of hedges and “If/Then” clauses; He is making both a bold call and yet its conservatively phrased, leaving himself an out if it does not come to pass. Clever.
Lastly, in my collection of favorite links, Dr. Ed Yardeni’s Economics Network is one of the best. It’s comprehensive, including both data and commentary. It’s totally free — no regstration is even required. (That Ed Yardeni is a good man).
Sources:
Barron’s On Line
MARKET WATCH TODAY
http://online.wsj.com/barrons/article/0,,SB107392755611137100,00.html
Dr. Ed Yardeni’s Economics Network
Prudential Equity Group
http://www.cm1.prusec.com/yardweb.nsf/(YardeniHome)?OpenAgent
