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Quarter-End Insights

Our Outlook for the Market

Is it a good time to buy stocks?

Time to buy? The answer is yes, according to our bottom-up analysis of the U.S. stock market. Our equity analysts estimate fair values on 2,000 stocks, which allows us to roll those valuations up into marketwide and sectorwide opinions. As of Dec. 10, we think the S&P 500 is about 8% undervalued, which translates into a 13% expected long-term return. (To arrive at that return, we assume that market prices migrate to our fair value estimates over a three-year stretch.)

Slicing the market by sector, most areas are cheaper now than three months ago, in our opinion. In nine out of our 12 sectors, the median price/fair-value ratio is less than 1.0. We see the largest discounts in consumer (retail stocks in particular look cheap to us), financials, media, and hardware (where semiconductor stocks are cheap again). During the past quarter, we also raised our fair value estimates for a host of energy companies based on a more-bullish long-term oil forecast. The median energy stock we cover is now 6% undervalued.

 Sector Valuation Changes

Current Median

Three Months
( % )
Business Services 0.97 1.00 -3.3
Consumer Goods 0.94 0.97 -3.5
Consumer Services 0.84 0.92 -8.5
Energy 0.94 1.00 -6.3
Financial Services 0.92 0.98 -5.9
Hardware 0.93 1.00 -6.7
Health Care 1.00 1.00 0.0
Industrial Materials 1.00 1.01 -1.0
Media 0.92 0.98 -5.8
Software 0.96 1.02 -5.9
Telecommunications 1.00 1.05 -4.8
Utilities 0.98 0.96 2.6
Data as of 12-07-07.

Below, we dig into each sector in more detail, laying out which areas--and which stocks--appear cheapest to us heading into 2008.

Fears about the consumer have made some stocks very attractive.

We've raised our long-term forecast for oil prices and uncovered some new values.

Financials are on sale.

We see opportunities in tech hardware.

Health Care
Big pharma's pipelines are looking healthier--it's time to buy.

Macro headwinds stiffen across the industrials sector.

Advertising dollars continue to move to the Internet.

Plenty of opportunities among software firms.

Growth is limited, but we're still big fans of these mature international firms.

Merchant generation is back in vogue.