Bear Stearns Chief Investment Strategist Francois Trahan has the second highest forecast for the market in 2007. He says there will be a different dynamic at work this year compared with 2006, though. While earnings fueled growth last year, look for the first multiple expansion in four years to drive stocks this time around.
Trahan says the 15 times forward earnings that the overall market is trading at now will jump to 16.5 times forward earnings by the end of the year. That will be due to a “tame inflation outlook” and a “rebound in economic prospects,” such as gross domestic product trending back toward normal levels.
“You don’t really need to have a whole lot of earnings growth to carry stocks significantly higher if you’re going to get a point and a half of multiple expansion,” says Trahan.
Trahan expects the S&P to hit 1,600 but still considers that “the low end of possibilities.”
“Once multiples start moving your way, stocks tend to go up very, very quickly,” he says.
Trahan has shifted his equities holding recommendation to 70% from 50%. Hypercyclical stocks like technology and semiconductors should lead the way, he says.