Many investors rely on the “wall of worry” theory but markets eventually get winded from such a climb. Keeping that hackneyed saying alive, pundits and Wall Street brokers keep pointing to a positive long-term outlook, pushing stock prices ever higher. But keep in mind, earnings have been contracting for several months and that makes corporate growth easier said than done. Even so, analysts are already postulating a 10% gain for the S&P 500 in 2013 even though earnings are forecasted to be less than half that number. Further complicating the ongoing conundrum, global growth forecasts are being trimmed, again. Rates are lower in the U.S., Japan and Italy, among others and unemployment continues its rise in Brazil and the Eurozone. Even so, the overall global forecast for 2013 calls for growth: the International Monetary Fund is estimating 3.6% growth in 2013, versus 3.3% in 2012. We break down global growth trends into three classifications. High-growth regions are led by China and India, forecast to grow 8% and 6%, respectively, next year. The middle tier includes countries such as the United States, Japan and Great Britain, in the 1%-2.5% range. The bottom-tier includes Eurozone countries such as Spain and Greece, which are in recession and are likely to contract again in 2013. Italy remains a wild-card; if its can recover without a major bailout, the Eurozone recession will not be as deep or as prolonged as forecast. Elections next spring will likely be crucial in setting the direction for the country: will voters agree to maintain austerity set in place by PM Mario Monti? If confidence in Italy falters, the IMF may once again cut its outlook for growth next year. If grwoth remains sluggish, how can we expect stock prices to move higher?
The answer is simple, P/E expansion. In other words, investors are willing to pay more for a dollar’s worth of earnings next year than they are willing to pay today. Money managers assert that current P/E’s are low on a relative basis. Comparing stocks to extremely low interest rates would support their claim of relative value. Even so, I believe current P/E’s are too high and don’t accurately reflect slower forecasted growth. As we move towards the close of another year, I can point to five factors that merit special attention. The so-called “fiscal cliff”, growing tensions in the Middle East, ongoing crisis in Europe, corporate earnings and further global slowing; any one of these will significantly impact and already anxious market.