Posted by Shyam Moondra
Many analysts are expressing puzzlement over the resilience of the stock market that has increased by more than 100% since the crash of 2008. An increasing number of analysts have been calling for a major correction, of the order of 15-20%, but the market doesn't seem to be ready to make a U-turn. Since Apple stock represents a major part of the key stock indices, some analysts believe that astronomical increase in the value of the shares of Apple (a whopping 45% this year alone) is a major contributing factor for the stock indices to show sustained appreciation. They argue that when the Apple party is over, the market will fall precipitously. At least, that's what many analysts theorize. However, given Apple's product momentum and relatively low PE compared to other technology companies, it may be a while before Apple stock pulls back.
It's important to remember that analysts have not always been right. When the market was in the process of forming a bubble in 2007, the analysts were still making outlandish forecasts at a time when S&P 500 PE was over 35. Then came the financial crisis but analysts were too slow to anticipate the impending credit freeze that culminated into a full-blown crisis. The analysts were still making "buy" recommendations on stocks just before the 2008 crash that led to an unprecedented 50% decline in the equity values in a short period. Clearly, the analysts were behind the curve and didn't see the global crash coming.
Having burnt out by their inability to accurately gaze the worsening economic conditions of 2008, the analysts are now making the same mistake of being behind the curve in not accurately interpreting the brewing positive economic trends. Although recent reports on retail sales, industrial production, consumer confidence, and inflation point to strengthening economic recovery and improving employment picture, the analysts are too slow to increase their earning forecasts and stock price targets at a time when S&P 500 PE is hovering at around 14, well below 20's that would be considered a reasonable level for triggering a major correction.
A case can be made for the market to be in a major bull phase that could last for years. The corporate profit margin is at 18-year high and the corporate balance sheets show a record cash hoard of close to $3 trillion. The auto industry is selling vehicles near record levels with GM reporting the highest profits ever in the latest quarter. Even the unemployment rate, currently at 8.3%, has been declining, albeit slowly. The housing market, which was beaten down really badly, seems to be improving and could turn out to be a major driver of the U.S. economy in the coming years. It's conceivable that unemployment could fall precipitously in the coming months, just in time for the 2012 presidential election.
The stock market always thrives in an environment of low interest rates and low inflation that we currently have. The present stock valuations are historically too low and they look very attractive. It’s remarkable that companies like Apple have continued to produce record profits during the recession and yet the PE ratios remain at levels of 10 years ago. This shows that at current prices there is tremendous potential for stock price appreciation over the next 2-3 years. It would not be a surprise if analysts start playing a catch-up game and upgrade their forecasts by setting much higher stock price targets.
