IB Net Payout Yields Model

JPMorgan says World Economy Reaching 'Curising Speed'

Not really that surprising as countries like China and India are doing exceptionally well and the US is catching up. The other comment on earnings reaching $80 on the S&P500 next year surprised us. The market only trades at a PE of 13.7 making it suddenly cheap. How many go on TV claiming this market is the most over valued in a long time? Corporate profits have been a lot stronger then most expected. Just think, at the start of 2009 the US was in the worst economy since the Great Depression and yet before the year is over SP500 profits are back to $80. Thats incredible!

  • “Equity markets should rise again next year driven by strong earnings growth. Our $80 S&P 500 EPS forecast for 2010 is 27% higher than this year’s $63, implying a much faster rise in earnings than nominal GDP, i.e., an expansion in profit margins. Our forecast suggests that by the end of next year, US profit margins are likely to approach the historic highs reached earlier this decade.”

This earnings assumption backs our view that the market is about to breakout of the tight range its been in for the last 5 weeks or so. Should be easy to conjure up valuations in the 1,200 to 1,300 level with earnings at that level. Then as the calendar turns into March/April I'd expect some profit taking, tax selling, and then flat out fear over Obama raising taxes to finally cause a correction of 10% or more. It would be long overdue at that point. Still I won't see any downturn much below the current levels. More like a surge to 1,250 and then back down to 1,110.

As always though, we'll let the markets guide us when we get to that position. For now our portfolios are still close to fully invested.


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