As the third quarter comes to a close, the global capital markets continue to send mixed signals. After narrowly avoiding a European sovereign debt crisis and recovering from the May “flash crash”, investors are sifting through conflicting data to identify what other potential risks are just beyond the horizon. While the likelihood of a double-dip recession appears to have declined, the prospect for sustainable economic growth over the next several years is in question and this is increasingly a cause for concern. After a strong start in 2010, economic growth in the U.S., as measured by annual change in gross domestic product, continues to lose momentum, and unemployment remains stuck at 9.6%. Despite a total return of 8.9% for the S&P 500 in September, valuation multiples are below historical averages. The S&P 500 index is trading at 16.0x trailing earnings compared to the 20-year average of 20.5x , which can in part be attributed to investors’ skepticism regarding the ability of companies to generate sustainable earnings growth over the next several years.
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