The primary assumption is that economic and profit growth will resume by midyear.
Our valuation work for the S&P 500 has long assumed moderation of profit growth to about 8 percent from 20 percent and a rise in core inflation.
We expect profit growth to decelerate in the second half of 2004.
We don't think so, and continue to assume long-term earnings growth of 7 percent-to-8 percent in our valuation model.
Equity prices can rise, despite decelerating profit growth and moderately rising interest rates, if investors expect economic expansion to continue. In previous such cases, stocks outperformed bonds, often notably.