This morning the Wall Street Journal has a nice piece that discusses the hotly debated topic- are stocks currently cheap? Both sides of this debate tend to point to overly optimistic or overly pessimistic forecasts to help make their argument. Our perspective, which is in line with this article, is that stocks are certainly not cheap but they are not significantly overvalued either. For the stock market to continue to power ahead with a sustainable advance we need to see much stronger earnings growth than what we currently see. If you strip out bank earnings the S&P 500 companies that have reported so far actually have seen earnings drop .6% year over year. After five years of corporate cost-cutting, profit margins are stretched and appear poised to contract from record levels. This puts the onus on revenue growth to drive future earnings. With a sluggish global economy, double-digit revenue growth seems like wishful thinking in the near-term.
With a fully-valued market, stock and sector selection are critical to managing risk and achieving strong returns going forward.
For the Wall Street Journal’s excellent analysis click here: