Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania, has built a bullish case for stock market in this article.
Jeremy contests that bashing the stock value based on 2009 is not fair. If one looks beyond 209, next year's operating earnings on the S&P 500 Index are projected to be $74.34 a share, marking the index at 14.4 times earnings. And early earnings estimates for 2011 are at $89 a share, puts stocks at about 12 time earnings, according to him.
While Bears such as Gary Shilling use high unemployment as an argument that the consumers without jobs are not ready to jump in and unleash the economy, Siegel uses the same fact and points out that precisely as a result of high unemployment, productivity is high and company’s profit margin has improved. S&P 500 profit will surpass the high made in 2007 prior to the crisis pretty quickly.
His second argument is on valuation level. According to him:
Sounds logic.
What do you think?
Jeremy contests that bashing the stock value based on 2009 is not fair. If one looks beyond 209, next year's operating earnings on the S&P 500 Index are projected to be $74.34 a share, marking the index at 14.4 times earnings. And early earnings estimates for 2011 are at $89 a share, puts stocks at about 12 time earnings, according to him.
While Bears such as Gary Shilling use high unemployment as an argument that the consumers without jobs are not ready to jump in and unleash the economy, Siegel uses the same fact and points out that precisely as a result of high unemployment, productivity is high and company’s profit margin has improved. S&P 500 profit will surpass the high made in 2007 prior to the crisis pretty quickly.
His second argument is on valuation level. According to him:
Historical data confirm that the lower the rate of interest, the higher the valuation of stocks for any level of earnings. This is true because bonds compete with stocks in investors' portfolios, and the lower the interest rate, the higher the fraction of stocks investors want to hold. My own research shows that when inflation and interest rates are low, such as we have today, stocks sell on average at 18 to 20 times earnings, substantially higher than current levels. An 18 P-E ratio on 2010 estimated earnings of $74.34 for the S&P 500 is 1340, more than 25 percent above current prices.
Sounds logic.
What do you think?
