Siegel: Stocks Still Undervalued

Jeremy Siegel, the Wharton professor and Stocks for the Long Run author, thinks stocks remain undervalued, and says he expects US corporations to be producing record earnings by 2011 or 2012.

In an interview with Advisor Perspectives, Siegel says he thinks fair value for the S&P 500 is 1300-1350, if current interest rates persist. He thinks rates will rise, however, so he puts fair value closer to 1250 for the index, which started the day at about 1129.

And, Siegel says those interest rates will rise sooner than many think. He expects the Federal Reserve to up rates in the first half of 2010 as the economy strengthens, which could briefly rattle the stock market. “There will be a short-term shock, maybe even a 10% downward reaction as people say ‘oh my God, the Fed is tightening so early,'” he says.

“But people will see that those actions are being taken only when the economy is strong and the market will bounce back. That will be the first meaningful correction in this bull market that started in March.”

Siegel says he thinks earnings growth will be stronger than expected for the S&P 500 in 2010, with per-share operating earnings growing to about $70 a share (up from $56 this year). He thinks they’ll then climb to record highs — above $90 — in 2011 or 2012. Interestingly, he says operating earnings — which far exceeded reported earnings during the financial crisis — could lag reported earnings, as write-downs turn into “write-ups”.

Siegel also disputes the “new normal” described by bond guru Bill Gross, says he doesn’t think a “double-dip” recession is likely, and says no additional stimulus packages are needed for the economy to recover.

As for how to invest, Siegel offers the following: “Bonds are terrible now. I would not go into commodities. I would be internationally diversified. I think emerging markets are going to do very well. US stocks, especially global ones, will do well. European stocks, again especially the global ones, will do well.”

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