Legg Mason April Market commentary: April’s market returns offered a glimmer of hope to long-suffering large cap devotees, as the granddaddy of all market indices, the Dow Jones Industrial Average, was the star performer for the month, up 2.48%, while the small cap Russell 2000 Index was actually down a couple of basis points. For the year-to-date, small and mid-cap stocks still lead the parade, but the Dow Industrials have begun to close the gap.
We continue to be constructive on the outlook for the U.S. equity market, but our optimism has been tempered somewhat by the rise in 10-year U.S. Treasury yields from about 4.35% at the beginning of the year to about 5.10% currently. This rise increases the cost of capital in our market valuation model from 8% to 9%, which, in turn, lowers the fair value P/E multiple of the market. Our latest work shows the S&P 500 Index to be roughly fairly valued based on this year’s consensus earnings. We continue to expect earnings growth of about 10% in 2007 vs. 2006, and our best estimate is that the market will make upward progress of about that magnitude over the next twelve months. The range of outcomes around this central tendency is unusually wide at present, in our opinion, because the available evidence about the probable course of economic growth continues to be mixed and confusing.
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We continue to be constructive on the outlook for the U.S. equity market, but our optimism has been tempered somewhat by the rise in 10-year U.S. Treasury yields from about 4.35% at the beginning of the year to about 5.10% currently. This rise increases the cost of capital in our market valuation model from 8% to 9%, which, in turn, lowers the fair value P/E multiple of the market. Our latest work shows the S&P 500 Index to be roughly fairly valued based on this year’s consensus earnings. We continue to expect earnings growth of about 10% in 2007 vs. 2006, and our best estimate is that the market will make upward progress of about that magnitude over the next twelve months. The range of outcomes around this central tendency is unusually wide at present, in our opinion, because the available evidence about the probable course of economic growth continues to be mixed and confusing.
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