Newspaper article St Louis Post-Dispatch (MO)

Nicklaus: After Flat Year, Some Analysts Think Stock Market May Stay in the Slow Lane

Newspaper article St Louis Post-Dispatch (MO)

Nicklaus: After Flat Year, Some Analysts Think Stock Market May Stay in the Slow Lane

Article excerpt

If you were popping corks on New Year's Eve, it probably wasn't to celebrate your huge stock market gains.

The Standard & Poor's 500 index ended last year 0.7 percent below where it began, with dividends boosting its total return to 1.4 percent. That's paltry compared to the double-digit returns in five of the past seven years, but we may have entered an era where modest, low-single-digit gains are the norm.

Arithmetically speaking, the stock market boils down to profits and psychology, and neither force looks very powerful right now.

When the S&P 500 companies close their books on 2015, it looks like their profits will have fallen for the first time since 2008. Current estimates show a drop of 6 percent, mostly because falling oil prices wrecked the energy sector's finances.

Most analysts expect a rebound next year, but think the sustainable rate of profit growth is just 4 to 5 percent. That's also a baseline for what we should expect from the stock market unless we collectively decide we're willing to pay more for each dollar of earnings.

Investors currently pay $16 for every dollar of expected 2016 earnings. That number, called the forward price-earnings ratio, is close to its long-term average.

One could argue that the P/E ratio should be a little higher in today's low-interest rate environment. With the Federal Reserve starting to raise rates, however, that argument isn't as appealing as it was a few months ago.

"Valuation is still fair to undervalued, but not nearly the bargain it was before," says John Meara, president of Argent Capital Management in Clayton. "If you have earnings up single digits and valuation pretty fair, that's how we get to the math that shows single-digit returns."

K.C. Mathews, chief investment officer at UMB Bank, is also in the low-expectations camp. He thinks this may be a bumpy year. "I think you're going to see a lot of volatility around the Fed meetings," Mathews says. …

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