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 2001 to be yet another year of profit expansion, albeit at a slower pace.
We expect 1999 and 2000 to be years of ongoing profit expansion, with better aggregate gains than 1998, which was disappointing.
We expect profit growth to decelerate in the second half of 2004.
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.