stock prices down to a more sensible level, the market should be primed for another move higher. By 1999, we could see the next major move of the market, propelled by the technological revolution.
I’ve got a temperate outlook as well. I think that the historically high P/E multiples can hang around for a while if the economic environment is benign, as it appears to be. I’m not predicting another 20% gain for the S&P 500 because I think the earnings growth will be less than what we’ve seen. Asia could put a damper on profits, and corporations are going to have a hard time beating out a good year like last year. I think we’re in store for corporate earnings growth in the 6%-7% range for the S&P 500, and we’ll see stock market gains for the same group in line with historic levels, say 10%-12%. And, let me note that the combination of slower earnings growth and high P/Es could make for a bumpy ride in a highly volatile market this year.
I don’t think the market will be as strong as last year, when a “Goldilocks” environment of low inflation and good growth pushed the S&P up over 30%, with the Dow up 22%. Asia won’t overwhelm the U.S. economy, but troubles there will be a moderating factor in the stock market this year. And as Eric said, profit comparisons with 1997 will be tough. So, I’m looking for 10% or 12% on the upside for the market, fueled by maybe 7% or 8% corporate profit growth.
LARGE-CAP STOCKS SHOULD PROSPER BUT DON’T COUNT OUT SMALLER COMPANIES
Large-cap stocks–the big-name corporations that form most of the S&P 500- led the market’s rally last year. Our experts look for more of the same in 1998.
Large caps should perform very well this year. If the market gets volatile, investors will seek safety in many of the household names we know. Remember though, with a lot of people fearing ‘the Asian contagion’ as they call it, many of the small- and mid-cap stocks could take off. That’s because some investors might want to limit their exposure to big problems abroad, the kind big multinationals come in contact with.
I think small and mid-caps are going to do relatively well, even slightly outperforming the larger companies in the coming period. So you’ll see some of those companies more affected by the economic problems in Asia, but on the other hand, there are also many pure play domestic small- and mid-cap companies that will be less affected by activity over there.
JUST HOW MUCH WILL ASIA HIT THE MARKET?
Asia’s problem spots–Thailand, Indonesia, Korea, and even Japan–seem mired in a quicksand of economic problems that won’t go away. Our panel thinks that’s going to hurt U.S. corporations, but not as much as you might think.
Asia’s impact hasn’t yet affected U.S. corporate earnings, but it will soon. If you’re competing with a major player in Asia, your rival’s goods are going to be sold at up