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S&P 500 at 33% Discount on Future Profits, Joseph Cohen Says

Nov. 1 (Bloomberg) -- The Standard & Poor’s 500 Index is 33 percent cheaper than average for periods of similar inflation, making some energy and financial stocks “attractive,” Goldman Sachs Group Inc.’s Abby Joseph Cohen said.

The price-to-earnings ratio of the benchmark equity gauge is about 12 times profit estimates for the next 12 months, said Cohen, senior U.S. investment strategist at the firm, in an interview today on Bloomberg Television’s “In the Loop” with Betty Liu. That compares with an average of 18 times during “periods of moderate inflation” such as the U.S. economy is currently experiencing, and suggests the index is underpriced, assuming the U.S. economy can avoid recession, Cohen said.

“That’s not a high bar,” she said. “We’re not saying rapid economic growth or rapid profit growth, but avoid recession and have just modest economic and profit growth.”

The S&P 500 surged 11 percent in October, the biggest the biggest monthly increase since 1991, amid speculation European leaders will solve the region’s debt crisis, after the measure slumped from May through September. U.S. inflation has averaged 3.1 percent this year, compared with the historical rate of 2.5 percent in the last two decades, according to the consumer price index.

Stocks dropped yesterday, erasing the S&P 500’s 2011 gain, on concern Europe will struggle to raise financing for a bailout. Analysts estimate combined profits by companies in the benchmark gauge in the next 12 months will be $104.13, according to data compiled by Bloomberg.

The S&P 500 fell 2.8 percent to 1,218.28 today after Greek Prime Minister George Papandreou pledged a referendum on a new bailout package.

David Kostin, Goldman’s equity strategist, predicts the benchmark equity index will end the year at 1,200, 4.3 percent below yesterday’s closing price. He cut his price estimate three times in the three months through Oct. 4.

“This has been an extremely volatile market,” Cohen said in the interview. “It’s very hard to do short-term forecasts in that kind of environment. I wouldn’t worry too much about a particular year-end forecast but rather take a look at the expectations for the next six to 12 months.”

Kostin estimates the S&P 500 will climb to 1,300 in the next 12 months.

Cohen said companies in the energy and financial services groups are at “attractive” valuations. While commodity prices will increase as the global economy recovers, a number of stocks in the financial services industry are trading below book value, according to Cohen.

“Even if one has concern about the direction of margins or the precise level of earnings growth, it seems to be that in the past, to acquire these companies below book value has been an attractive thing to consider,” she said of financial companies. “If you believe the book value data this tends to be attractive, because markets and securities tend to sell well above book value.”

To contact the reporters on this story: Inyoung Hwang in New York at; Betty Liu in New York at

To contact the editor responsible for this story: Nick Baker at

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