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Investing Specialists

Economy Bulls Ahead While Stocks Take a Pause

The stock market has indeed come a long way during the last few weeks, making it vulnerable to the slightest disappointments.

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Although most of the economic indicators and corporate earnings reports looked great this week, the market suffered one of its worst sinking spells in months on Friday. Word of the government's fraud charges against  Goldman Sachs (GS) on Friday, combined with weak consumer-sentiment data and news that  Google (GOOG) was planning to gear up spending (at the expense of earnings) were the primary causes of the market's swoon.

I remain more bullish than ever on the economy, but the stock market has indeed come a long way during the last few weeks, making it vulnerable to the slightest disappointments. Based on Morningstar's fair value estimates of individual companies, the market is slightly overvalued. However, as overall economic growth continues, I believe there is continued room for upward revisions in both general economic forecasts and individual company forecasts.

While consensus forecasts for real GDP growth for all of 2010 and for the first quarter of 2010 remain mired in the 3% range, I believe growth in 2010 will exceed 4.5% and growth in the first quarter could be above 4%. Unlike the growth in the fourth quarter of 2009, which was driven by changes in inventory, first-quarter growth will be driven by consumer expenditures that I am forecasting to grow by a very healthy 3%-4%.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.