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Relax About The Stock Market Already, Says Sonders — The Outlook Is Good

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In the past few days, investors have finally begun to worry that the debt-ceiling fight in Washington will lead to a market crash.

And some of them have begun rushing for the exits.

Longer-term, investors worry that the stock market has come so far in the past two years--doubling off the 2009 lows--and that the economy is so rickety, that stocks can't possibly be a good investment here.

The chief investment strategist at Charles Schwab, Liz Ann Sonders, says they can rest easy.

Sonders thinks the debt-ceiling fight will get resolved and then blow over. She also doesn't think we're going to have another recession. She thinks the economy will continue to grow at a respectable rate of about 3% in the back half of 2011 and through next year. She notes that earnings projections for 2012 call for another year of double-digit gains in earnings growth and that stocks are not expensive based on those projected earnings.

And what about today's profit margins, which are back at record highs? It has been growth in profit margins, not growth in revenues, that has driven earnings growth in the past two years. Can profit margins really go any higher? In the past, when corporate profit margins have hit levels like today's, they have eventually violently reverted to the mean, crushing earnings. Won't that happen again?

Sonders says that the 2012 earnings projections actually assume that margins will shrink a bit and that much of the earnings growth will come from revenue growth. She also thinks stocks are cheap enough relative to the projected earnings that there's some downside protection.

See Also: Here's Why The Stock Market Is Screwed