Tuesday, July 12, 2005

S&P Multiple, and stock vs bond yields

So we had a third gain in a row after the London blasts. Briefing.com cites two reasons: (a) S&P is trading at 18.8x earnings, which puts its yield at 5.3% higher than bond yields at 4.1%. (b) Forecast for YoY earnings growth rate for 2Q has come down to 7.5%, below 8.8% at the beginning of quarter in April. And the market is reacting to the fact that reported earnings are always 2-5% higher than consensus.

(a) I read somewhere, maybe in "Stocks for the long run", that stocks yielded higher than bonds before World War II, then the relationship inversed. The prevalent thinking was that stocks being a riskier investment should yield higher than bonds. Many investors shorted stocks at that time thinking that they are overpriced, and lost their shirt. Are we again entering an era when stocks would yield higher than bonds? Maybe before World War II, capital movement was more free than it was for the next 50 years (human movement was definitely more free - no passports et al) , are we entering that phase again?

(b) Where is this fact of earnings growth being 2-5% higher than consensus coming from? I though stock analysts either overshoot or undershoot - there cannot be an always statement.

Should I go into the market, should I not? With dollar being as strong as it has been, wouldn't Dell, Intel, Cisco etc get hurt?

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