America’s S&P 500, the world’s most widely watched index, last week exceeded its 2007 record, closing above 1,565 for the first time. It has gained an impressive 10% this year and 132% since its March 2009 low. Can the run continue?
As we noted last week, the fundamentals don’t justify the rapid gains. Given “all the risks out there”, expectations for economic and earnings growth “seem too optimistic”, says Derek Hoyt of KDV Wealth Management. Hiring isn’t yet strong enough to fuel robust GDP growth in America, reckons Hoyt.
Recent data has been patchy, with an unexpected setback for the manufacturing sector in March offsetting encouraging news on the housing market. The global economy has yet to reach take-off velocity.
Chuck Jones on Forbes.com notes that earnings slid marginally year-on-year in the first quarter, and so third- and fourth-quarter growth projections of 11.4% and 15.6% look a stretch.
Historically high margins also militate against earnings growth. The S&P’s cyclically adjusted price-to-earnings ratio (CAPE) is far above average, implying mediocre returns from here.
But for now, “the bulls have the swagger”, says Gordon Charlop of Rosenblatt Securities. It’s all about liquidity. As Jim Rogers puts it on CNBC, “give me a trillion dollars and I’ll show you a good time too”. Europe remains a better bet for investors as CAPEs are lower – and will slide further if jitters over the eurozone chase away the cheap money-induced feel-good factor.