Reuters: Goldman's Cohen says S&P underpriced (14 Jun 2006)

What a quick change of view...

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Goldman's Cohen says S&P underpriced

Wed Jun 14, 2006 2:11 PM ET

By Emily Chasan

NEW YORK (Reuters) - A lot of the correction in U.S. stocks has already been completed, and the Standard & Poor's 500 index <.SPX> is currently underpriced, Goldman Sachs' Chief U.S. Investment Strategist Abby Joseph Cohen said on Wednesday.

"We think a good deal of the correction has already occurred," Cohen said at the Reuters Investment Outlook summit in New York.

"Looking at the fundamentals ... on that basis I would say the S&P 500 looks underpriced right now," she added, noting that based on her fair value estimate for the S&P of 1,400 by the end of the year, the S&P is underpriced by about 12 percent.

Cohen said she expects U.S. economic growth and corporate profits to slow, but that they will continue to expand at a more sustainable rate.

FED NEARLY DONE

Partially driving Cohen's view is her expectation that the Federal Reserve is nearly done raising interest rates, she said.

"The Fed is probably going to be finished before the end of the year," Cohen said. "This is a Federal Reserve that has already done most of what it is going to do. The fact that people are quibbling over whether they are going to do one more or two more, in some ways is very important on a day-to-day basis. But in terms of the intermediate to longer-term outlook, it doesn't really matter."

She added that she does not expect the Federal Reserve to dramatically overshoot its cycle of interest rate increases.

"We think the Fed is finished with another one or two increases likely," Cohen said.

MOMENTUM REVERSED

Investors' fundamental attitudes have also been changing, Cohen said.

"There was a very significant interest on the part of investors to chase momentum," she said. "From the market perspective, over the last five weeks there has been an incredible reversal of momentum ... the momentum that drove small-cap and high-beta stocks I see reversing."

U.S. stocks have fallen off May peaks in recent weeks, amid a global rout on concerns about rising interest rates and inflation in the face of slower economic growth. The Dow Jones industrial average <.DJI>, Nasdaq Composite Index <.NDX> and S&P 500 index have all erased their gains for the year.

Cohen said she does not expect commodities to repeat the rally they have seen over the last three years, and that she liked investments in U.S. technology and industrial stocks, as well as the Japanese market.

"Within the equity market I think some of the best value opportunities are among those companies that would benefit from a long-lasting economic expansion," Cohen said.

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