Best Numbers in Ten Years for Stocks

One must go back more than 10 years to find better stock market valuations. Ten years ago, the projected earnings to price ratio for the S&P 500 Stock Index was below where it is now but US 10 year treasury bond yields were higher. You may recall that the following four years were wonderful years to be invested in these stocks.

My belief is that treasury bond yields, which were down again today, are headed for the 4% range. Should the yields reach 4%, stocks could easily support P/E ratios of 25! Current earnings projections put the ratio at less than 14. Even assuming that there's no increase in earnings, one could still imagine stocks going up 78%! Wow! (25/14 = 1.78).

Now don't go running around telling folks that I said the market is ready to move up 78%. I can imagine it happening but I am not predicting it will. In the energy area, I believe earnings will go up this year but I believe PE ratios will decline. The net result will be that most energy stocks companies will enjoy good earnings but the price of the stocks will not go up.

Here are some brief takes for the current market:

The Pirates of the Caribbean sequel set box office records. Disney (DIS) is on a roll.

Chip makers are ordering equipment: orders up 24.8% so far. Microsoft (MSFT) will release Gargantua programs by January 2007 so expect to buy new machines if you want to run the new stuff. Buy equipment and software companies if you want to make money.

MSFT and Google (GOOG) are in yet another race. MSFT will probably be the first to market a hand held combination device that will be kin to a game boy, kin to an I-Pod and kin to a portable computer. The Google product will be more of a GPS mapping, location service and communication device. The market for these products is going to be huge.

Expect continued merger activity in the equipment makers, along the lines of the Nokia (NOK) deal. Motorola (MOT), Texas Instruments (TXN), Nortel (NT) and others may need to get big in a hurry or they may need to partner with Google.

Comments

[Ross Briggs]

The low P/E ratio's we are seeing relative to the market is a function of INFLATION. The denomination we measure companies in (US dollar) has dropped signifcantly and therefore companies are in the best shape in 10 years? Dollars are increasingly easy to make for large corporations, while at the same time wage earner's have not seen these benifit's therefore balooning profits and not much share movement.
Low PE's also reflect American and foreign investor's lack of willingness to pay more for a company just because it is American, we are under a global economic shift not leaning toward America's side.

America's economy will roar before it declines but the best pick's are msft and goog? Come on! I'm sure goog will grow its revenue but the fact that they are entering the handset market (increasing competition) in an economy losing savings and disposable income quickly.

About your energy comments:
The main product of oil producers has just about doubled, they were making money before, now they are making twice as much. Given, todays barrel costs more to pump than yesterday's but not twice as expensive!
Does it seem like oil prices are going up or down? (I'd say up)
Would that not be considered a growth oppurtunity?

With most oil companies sitting at about 10 times earnings i don't see P/E ratio's dropping at the rate profits are soaring...

Oh and having to buy a new CPU to run VISTA is definately what i want to do, with my -0.3% savings, tapped out home equity and raising intrest rates.... [Edited by SA]