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Prof. Jeremy Siegel speaks at Wharton Global Alumni Forum in Madrid, Spain, in 2010

Portfolio > Economy & Markets

Stocks Set for New Highs: Jeremy Siegel

By Dinah Wisenberg Brin

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What You Need to Know

  • Economist Jeremy Siegel says that the market is strong, with lower inflation and good profits.
  • He also says he sees no significant overvaluation in the stock market.
  • In his column, Siegel says that he lowered his outlook on the chances of a recession.

Economist Jeremy Siegel thinks the U.S. stock market is heading to new highs, given an improving economy and better corporate earnings outlooks.

“This is such a strong market,” the Wharton School professor emeritus of finance said Friday on CNBC’s “Closing Bell.”

Companies’ guidance was tentative in the first half, but now executives seem more confident as internal factors improve, Siegel, also a senior economist at WisdomTree, said. Among other positive signs, the Employment Cost Index came in below expectations, he said.

“Goldilocks — lower inflation and stronger economy and good guidance and good profits, what’s to stop this market now?” Siegel said.

He made similar comments on Monday in his weekly WisdomTree column: “For now, it looks like the markets are bound to make new highs.”

The economist said on CNBC that he’s unsure whether the Federal Reserve and Chairman Jerome Powell are done raising interest rates, “but what I’m pleased about is that he acknowledges that there are two-sided risks,” and that Fed officials enter meetings without preconceived notions on what they’ll do with rates.

“They’re going look at the data, which is something that I’ve urged for quite a while,” he added.

The U.S. Bureau of Economic Analysis last week estimated that GDP grew by 2.4% in the second quarter, after increasing by 2% in the first. No one thought the U.S. economy would grow faster than 2% in the first half, “so inflation coming down, stronger economy, I don’t see this stopping any time soon,” Siegel said.

While Siegel previously was concerned the Fed was looking only at lagged economic data, “I think now the Fed gets that, and they realize that there are a lot of lags in that system and that they have to look at … forward-looking [indicators], so I’m less worried about that now that I was three or even six months ago,” he said.

The economist also said he sees no significant overvaluation in the stock market.

The S&P 500 is at 20 times next-12-months earnings, which is “about average,” he said. Tech stocks are at 30 times, and value stocks at an “extremely reasonable” 14 to 16 times range, he noted. One could argue that tech stocks may be a bit over their skis, and Siegel prefers value stocks, but he doesn’t see the market overall as significantly overvalued.

Lower Recession Odds

In his column today, Siegel said he had lowered his view on the likelihood for recession. While the currently upward trending economic indicators don’t guarantee there won’t be a downturn, he’s lowered his outlook on the chance of a recession to below 50%.

“If forced to give a probability, perhaps I would say 30%,” he wrote.

“There’s some weakness in the manufacturing sector, but consumer sentiment is still very strong,” he said. “We don’t have a runaway booming economy, but the recent reports indicate a strong economy.

“Summarizing: All this economic view is good for stocks and earnings. The strength reduces recession probabilities, which was the greatest fear for the markets. It leaves value stocks very well priced because they were basically priced for recession and declining earnings.”

Tech stocks are expensive and could react to the higher interest rates, but it’s a momentum trade and “earnings certainly have come in very well this quarter,” he added.

Photo: Bloomberg

Dinah Wisenberg Brin

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