As stock prices fall, there may be value which could provide upside over the next few years. U.S. fundamentals in 1997 will include an acceleration in GDP growth and a modest upturn in profits, most likely by mid-year. The Federal Reserve will be watching developments at home and in other major economies. Deceleration in Japan and ongoing weakness in several European economies may impede growth in the U.S. and profits at American multinationals. However, the offset for the equity market may be reduced inflation fears and lower interest rates.
Fundamentals are solid.
Prices should increase as corporate earnings and cash flow keep improving. But exceptionally strong returns, like those in 1995 and 1996, only occur when stocks start at undervalued levels. Before the year-end, we expect the Dow to reach 7050. There were wide performance differences last year, leading to gaps in valuations between individual stocks in the same industry. Three stock groups should be emphasized.