Sunday, April 29, 2007

Weekly Look Ahead

Last week saw strong market gains despite surprising and negative economic information. This makes it hard to predict what will happen next.

There is a lot of economic news coming out this week and a fair amount of it is likely to be negative. Investors will get readings on construction spending, pending home sales, factory orders, the manufacturing and services sectors, and personal income and spending (see chart for details).

With more than 2.3rds of the S&P having reported earnings it looks like earnings growth will come in around 6.8%, a serious decline from the last few years. Despite the negative news investors have priced in assumptions that the economy, while slowing, will not go into recession. At some point that sentiment should change... although possibly not for a few more quarters.

One thing is certain though. Based on a hard value analysis point of view the lower growth rates are making stocks seem more expensive. Rising stock prices and declining growth can only go on for a limited time.


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