2011 was rough year for investors who traded on fundamental analysis, because unfortunately, the stock markets didn’t trade on fundamentals.Stephen Auth, Federated Investors’ Chief Investment Officer, argues as much. From his note published on Friday:
Looking back to components of our 2011 outlook, we see that we actually got most of the fundamental pieces of our forecast directionally right. The domestic jobs picture remained solid though unspectacular. Auto sales continued to recover nicely. Corporate earnings exceeded our $95 target for the S&P. U.S. states began addressing their fiscal issues and saw their spreads—state bond yields relative to comparable Treasury securities—generally tighten. Even housing starts, while failing to meet our optimistic forecast of 750,000, did rise above the 600,000 annualized pace for the first time since the Great Recession began four years ago.
What we got wrong, more than anything else, was that risk premiums on equities, already high, would go yet higher, driving the market multiple on trailing earnings down yet lower, to 14 on the S&P from nearly 17 at this point last year. We think the key driver of the rise in risk premiums three years after the Lehman bust roiled risk market worldwide was the ongoing drama in Europe…
Nevertheless, Auth is sticking to the fundamentals.
Call us Charlie Brown kicking the proverbial football held by his dear friend Lucy, but we are reinstating our 2011 S&P 500 target of 1,450 for 2012. We think this will be powered by the two forces that in 2011 neutralized one another (earnings up, P/Es down) eventually working in unison. We also believe that once this process starts, the upside on equities will be substantially higher than 1,450, though it may take several years to achieve this.
Auth’s 1,450 target assumes EPS of $110, which is above Wall Street strategists’ average estimate.
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