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Partners in Building Wealth

February 2015

Stock Market Outlook

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Stock prices continue to climb as earnings estimates for US companies come down, resulting in price earnings ratios that are beginning to look stretched. For example, many large cap growth stocks such as Starbucks are trading at 30 plus multiples.  Going forward there are only two ways that valuations will look reasonable; either stock prices decline or earnings move higher.  What is surprising is that the market has not followed the earnings estimates downward.  We mentioned in earlier notes that only two things ultimately drive stock prices – earnings and interest rates. The reason the market is ignoring the decline in earnings estimates is low interest rates.  Investors drove stocks higher again in 2014 in the hunt for higher returns. Contrary to what pundits expected, the interest rate on the 10 year US Treasury note fell from 3% at the end of 2013 to 2% by yearend 2014. Significant amounts[more…]