By Chris Tracey, investment director The S&P 500 ended the year down for the second year in su...
By Chris Tracey, investment director
The S&P 500 ended the year down for the second year in succession and indeed the closing level of 1148 was 7% below its 1998 close. Interestingly, earnings per share forecasts for 2002 of US$50 are not dissimilar to the US$51.68 actually achieved in 1999.
On the economic front, a series of indicators are now showing that the recession is in the process of bottoming out. However, although the economic news is undoubtedly getting better, it is worth bearing in mind that consumer spending is coming out of savings, such that the savings ratio, which collapsed to 0.2% in October before recovering mildly to 0.9% in November.
Essentially, the level of personal and corporate debt makes us question the likely strength of the coming economic upturn. If the economic upturn is muted it is unlikely that US corporate profits are going to shock on the upside during 2002. After all, nominal economic growth of perhaps 4% is not a great backdrop for corporations to grow revenue and margins.
The issue, therefore, is whether a prospective P/E of 23 times the consensus US$50 EPS for 2002 is likely to be expanded. We see positive returns this year, but probably not much more than represented by the increase in earnings.
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