It was a rough week for investing in the stock market, as the major indexes retreated in response to more bad subprime lending news, weakness in the housing market, and a lack of funding for leveraged buyouts (LBOs). The S&P 500 and the NASDAQ fell close to 5%, while the Dow gave up approximately 4% vs. the week prior.
While many fear a decline in LBO activity will doom the markets, corporate earnings and market valuations suggest otherwise. As Andrew Bary noted in the latest issue of Barron’s, the economy is robust and corporate profits are relatively strong. For example, GDP growth in Q2 ‘07 came in above expectations at around 3.4% (up from less than a percent in Q1). Further, at 15 times projected ‘07 earnings, the S&P 500 does not appear overvalued. This suggests the markets may still have upward momentum through the end of 2007.