Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Global equity: Needs a new leader? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Oct 19, 2002

    Global equity: Needs a new leader?

    With a sharp rally in U.S markets over the past week, domestic bourses -- like global equities -- registered a positive week. However, spillover effect on global markets was restrained, which could indicate that investors do not have much faith in the U.S rally. That said, the domestic earning season is progressing well leading to improved sentiment.

              Dow Jones: Power pack
    Company CMP* ($) Mkt. cap ($bn) P/E**
    Alcoa 23 19 37.9
    GE 27 267 18.9
    J&J 60 181 29.5
    Microsoft 51 275 35.1
    Amex 34 45 23.8
    GM 35 20 14.1
    JP Morgan 19 37 17.5
    P&G 90 117 27.0
    Boeing 30 24 86.4
    Home Depot 29 69 19.5
    Coca Cola 46 114 36.1
    SBC Com. 25 82 16.1
    Citigroup 36 182 11.4
    Honeywell 22 18 28.3
    McDonalds 18 23 14.5
    AT&T 12 46 -
    Caterpillar 40 14 21.3
    HP 13 39 -
    3M 125 49 28.8
    United Tech 60 28 14.2
    DuPont 42 42 19.6
    IBM 72 123 23.8
    Philip Morris 40 86 9.1
    Walmart 55 246 33.4
    Disney 17 34 30.7
    Intel 14 95 47.7
    Merck 51 115 16.0
    ExxonMobil 36 246 23.2
    Kodak 32 9 44.4
    Int. Paper 37 18 -
    *Current market price on 17/10/02,
    ** trailing 12-months

    Over the past week, Dow Jones and Nasdaq jumped by 14.2% and 15.5% respectively. However, in all probability, U.S markets are likely to register three consecutive years of negative return. Year-to-date, Dow and Nasdaq are down 17.4% and 34.9% respectively (Sensex - down 7.9%). Having fallen consistently for more than a month, the bounce back is likely to have received further support from blue chips meeting earnings guidance. Divergent schools of thought on future direction of the economy is likely to be resulting in increased volatility. Markets touching 5-year lows and corporates meeting guidance have come as shot in the arm for the bulls. On the other hand, citing valuations, bears believe in further downside. Post September 11, rally in the U.S markets was supported by expectations of sustained economic recovery from second half of 2002. Stretched valuations were justified, as earnings were expected to bounce back. We had maintained that with earnings bouncing back, valuations will revert to mean, weighing down on any market uptrend. At 8,275 the Dow Jones trades on a rich multiple of 26.9x trailing 12-month earnings. However, more weight is given to forward earnings multiple, as markets discount future performance. On 1-year forward earning estimates (Yahoo Finance), at current levels, the Dow is trading on a multiple of 21.2x.

    Assuming a long-term average 1-year forward earnings multiple of 20x, Dow is trading near to mean. On a multiple of 21.2x, the implied future earnings growth rate is 27.2% -- as earnings increase price/earning ratio (PER) declines. Over the past two years, despite bursting of the bubble (return to rational expectations) and a weakening economy (reflected by reducing interest rates), U.S investment community continued to expect earnings growth. Consequently, corporates have not been able to match expectations leading to bigger disappointment on the street reflected by sharper correction on markets. Hubris on part of the community to accept weakening fundamentals is likely to have accentuated the pain.

    That said, for Dow to sustain current levels, the economy will have to recover over the next 12-months and earnings growth will have to pan out as per expectations. Intuitively itself, and considering recent earning disappointments, the risk to Dow performance is on the downside. At current multiples, lower than implied growth over next 12 months will weigh down on the index.

    Dow: Where is it headed?
    Dow Jones (17/10/02) 8,275
    Trailing 12-month P/E 26.9
    1-year forward P/E 21.2
    Implied earnings growth* 27.2%
    * Yahoo Finance

    Further, a long-term average 1-year forward earnings multiple of 20x implies that in bullish times, due to higher expectations, valuations -- PERs -- are likely to get stretched (25x). While in bear phases - due to all-round pessimism resulting in lack of hope -- PERs tend to contract (15x). At 21x 1-year forward earnings, the multiple implies that the economy/earnings have bottomed out. In recent past, markets have adjusted to earning declines only post event -- not been able to call a bottom. Consequently, there is a risk of the same being repeated.

    Bear phases, characterised by declining markets, are as much about contraction in expectations -- lack of confidence in future prospects. Although markets have declined, implied future earnings growth of 27% suggests that the second maxim is not being met. And so we hear markets waiting for 'final capitulation'. However, belief in future prospects continues to stubbornly linger, which could lead to a more drawn out bear phase. That said, at 15x 1-year forward earnings, the Dow Jones value works out to 6,034. An Equitymaster poll suggests that 83% of users believe U.S sentiment towards equity will affect domestic market performance. Consequently, impetus from the West looks unlikely.



    Equitymaster requests your view! Post a comment on " Global equity: Needs a new leader? ". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)