Did Someone Say `Dow 7000'?

Just a few months ago, the prospect of the Dow reaching 5000 seemed about as likely as O.J. Simpson's lawyers working pro bono. Now, with the Dow Jones industrial average close to 4700--up almost 22% year-to-date--Dow 5000 doesn't seem so outrageous. Sure, investors may get spooked by some negative surprises in upcoming second-quarter earnings reports. And some tech stocks may fall to earth this summer. But overall, tech stocks are on a major uptrend and will continue to carry the market higher.

Over the long term, some analysts make a case for the market not only hitting 5000 but going well beyond it. After all, corporate profits are the healthiest they've been in decades, and the price-earnings ratio of the Standard & Poor's 500-stock index is a modest 13.6, according to First Call Corp.'s database of earnings projections for the next 12 months. Also, inflation seems tame, and interest rates are low and could head lower. One analyst goes further than most, saying the Dow could reach 7000 by the end of the decade. Contrarians could read that as a signal that the market is ripe for a short-term correction. And, of course, if the economy slips into a recession, all bets are off. But after the recent reduction in interest rates by the Federal Reserve, recession seems less likely.

"MUSIC TO OUR EARS." In his recent report to clients, "Dow 7000," Ralph J. Acampora, Prudential Securities Inc.'s director of technical analysis, maintains that the U.S. stock market is in "the first stage of a classic bull market." The market's recent meteoric rise is not unprecedented, he says, but reminds him of the period from 1962 to 1966 when the Dow nearly doubled, rising to 975. Acampora believes that 1994 can be defined as a bear market and that the long-term direction of interest rates is down. He takes negative sentiment among market newsletter writers as a positive: "Their doubts and concerns ...are like music to our ears." Acampora's optimism is also fueled by the U.S. being "the lead player in the high-tech revolution."

Morgan Stanley & Co. strategist Byron R. Wien is also a tech bull. Recently, he advised Morgan's clients in Europe to buy more U.S. tech stocks. "What sets technology off from the rest of the economy is the major secular shift to more information at every level of business and personal life," he argues. Unlike other industries that are closely tied to local and world business activity, tech companies operate on a different plane, he says, riding an "unprecedented wave of demand."

GOOD BUYS. That wave of demand has led to some eye-popping prices. Intel Corp., for one, has more than doubled since the beginning of the year. "Price appreciation looks fantastic," says Bluford H. Putnam, chief strategist for Bankers Trust Global Investment Management. "But so does the profit picture." A number of attractive tech stocks have p-e's in the neighborhood of the S&P 500's current 17. EMC Corp., a computer systems company, sports a p-e ratio of 20. Hewlett-Packard Co. trades at a p-e of 21. Intel Corp. trades higher, at 23 times estimated 1995 earnings. But some tech stocks with sky-high p-e's are well worth it, such as Microsoft (p-e: 41), according to analysts at Morgan Stanley.

The market may hit a bump or two over the next few months, but the long-term picture looks bright. And who knows: Maybe Johnnie Cochran will work pro bono.

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