COVER STORY: Polished Performance by Michael Santoli
Highlighted companies: General Dynamics Corp. (NYSE:GD), Merrill Lynch & Co. Inc. (MER), Dean Foods Co. (NYSE:DF), Weatherford International Ltd. (NYSE:WFT)
Summary: The DJIA is up 14.6% to 12,278 and in October hit a new all-time high. The Nasdaq Composite has gained more than 10%. Barron's interviews nine major Wall Street strategists and gets their predictions for the coming year, with a few stock picks. Some key points:
Related: Using P/E Ratios As Buy Signals, Is Stagflation on the Horizon For 2007?, Us vs. the Fed -- Who Drives the Market?, Falling Dollar: Who Stands To Gain?, Barron's Post-Election Sector Analysis, Barron's Q4 Analyst Roundtable
- Forecasters look for an average 8% gain in 2007, putting the S&P 500 at 1520 by year end. Each of the nine strategists is expecting an up-year for stocks, but the most ardent bull thinks the S&P will rise a paltry 13%.
- Goldman Sachs' Abby Joseph Cohen: "Share prices properly reflect a favorable fundamental picture for 2007. Growth is moderating, inflation pressures are abating and the [Fed] is expected to maintain a friendly stance." Henry McVey of Morgan Stanley: "Stocks look cheap relative to bonds at current levels."
- Interest rates: The bond market is betting heavily that the Fed wants to lower rates to head off a housing-induced slowdown, and assume that Bernanke's emphasis on continuing inflation threats is mere lip-service. Among the analysts, the most aggressive call for lower short-term rates is for the Fed to shave 1.25 points off today's 5.25% federal-funds rate in 2007 -- Michael Ryan of UBS and Goldman's Abby J. Cohen share this view. Tom McManus of Bank of America thinks the market is "overly confident" about the prospect of an imminent rate cut.
- Sectors: Emerging market demand may put continued pressure on commodity prices. This year 79% of earnings growth came from relatively low-multiple sectors: energy, financials, telecom, utilities and industrials. 2007 forecasts imply that 67% of growth will be generated by health care, technology and staples. Francois Trahan of Bear Stearns sees the market under pressure in early 2007 until the Fed satisfies investors' wish for a rate cut. At that point he advises buying tech and consumer-discretionary shares, typical early-cycle, bull-market leaders.
- Picks: Henry McVey of Morgan Stanley says he's hunting for companies with rising returns on equity, partly driven by greater balance-sheet leverage. With profit margins peaking, outperformers will separate from the pack. Examples given: General Dynamics (GD), Merrill Lynch (MER), Dean Foods (DF) and Weatherford International (WFT).