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Good value in S&P 500 Add to ...

The U.S. stock market has priced in the occurrence of a recession, and if one fails to emerge, equities will see a significant rise. Corporate earnings expectations are starting to slow, but the outlook for the full year and even next remains very healthy. And Europe is a disaster waiting in the wings.

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These are the sound and unemotional conclusions of Dirk van Dijk, chief equity strategist for Zacks.com.

His report, posted Thursday courtesy of Pragmatic Capitalism, is a great quantitative look at what the market has been doing and what the real expectations for it are.

Among his comments:

Looking ahead to the third quarter, year-over-year growth of 5.9 per cent is expected for S&P 500 companies. That forecast is down from the start of reporting season, when revenue growth of 9.6 per cent was expected.

Nevertheless, expectations for 2011 remain “very healthy.” Profit from S&P 500 companies should hit $916.1-billion (U.S.), up from $793-billion in 2010. Analysts’ overall forecast for 2012 sees profit passing $1-trillion for the first time.

That translates into a hypothetical EPS for the whole S&P 500 of $96.02 a share this year and $105.79 next year.

“In an environment where the 10-year T-note is yielding 1.92 per cent, a P/E of 14.3x based on 2010 and 12.4x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 11.2x,” he writes.

Mr. van Dijk also notes that 48 per cent of S&P 500 companies boast dividend yields higher than the yield on 10-year Treasuries, and 69 per cent yield more than the five-year note’s 0.8 per cent. In fact, 104 of the 500 companies yield more than even the 30-year U.S. government bond of 3.25 per cent.

“At these levels it is clear to me that the market is pricing in not just slower growth, but an outright recession, either under way or just about to get under way. If it turns out that we avoid an outright recession, and the decline in profits that usually comes with one, then the market should rally from here,” he noted.

“If the European banking system goes down, ours will follow as night follows day (or at the very least we will need to see “Son of TARP”). This is not a problem caused here, and is not the fault of Obama, or Bush, or Congress or even the Tea Party, for that matter. It is a mess of the Europeans’ own making, but its effects will be felt here, just as the effects of the mortgage mess of our making were felt there.”

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