We think that what happened last week in the markets will prove to be primarily a market event… When we take a look at the S&P and the Dow, our feeling is that the fundamentals supporting these stock markets are, in fact, in very good shape.
It appears to us that things are proceeding in a good way – moderate inflation, good growth, and the profit reports for the 2nd quarter have actually been quite good.
We get paid to look around the corner and into the future, and over the next several months and quarters we think that the equity market looks to be in good condition. We don’t see an economic recession, we think that corporate profits continue to grow at a moderate pace, and importantly valuation – we think – is not at all stretched in the equity market. Indeed, the S&P 500 is currently trading at under 16 times earnings. Normally when inflation is under 3% the average P/E multiple is 18 ½ times. So we’re below where we normally would be on a P/E ratio basis. Using the more sophisticated dividend discount model, or discounted cash flow models, we believe that the appropriate year-end value for the S&P 500 is about 1600, or about 10% above where we are now.
We believe that many of these companies in the financial services industry are still in very good condition. What we know, for example, is commercial banks have been applying very good lending standards and the problems seem to have existed among those lenders who may or may not be part of the S&P 500 who relaxed those standards too much.
~ Abby Joseph Cohen, chief U.S. portfolio strategist, Goldman Sachs, as appeared on CNBC, July 31, 2007 at 9:00 am