The SP 500 closed above 1500 today, so I have it as fairly valued,
having caught up with the higher price level dictated by lower
inflation and a still positive earnings progression.
To stay in a bull market in the US, here is what is needed:
1) The US economy must gradually resume growth of about 2.75%.
SP 500 profits need to resume yr/yr growth of at least 8-10% well
before the year is out. This implies moderate pricing power at
the top line coupled with 1.5% productivity growth and continued
moderate wage growth. Look for continued share buyback programs
as too many companies have implied internal growth rates that
cannot be satisfied by internal investment (Book ROE% is high and
earnings plowback is high, yet the global economic pie is not
growing fast enough to accomodate internal redeployment of all that
capital).
2) Inflation must stay contained at 3% or lower when viewed on an
intermediate term basis. US economic growth of 2.75% will put upward
pressure on domestic operating rates. Thus capital investment must
expand rapidly enough to keep operating rates rising only slightly.
Capacity growth has been too slow to date in this current economic
expansion.
3) Further increases in the Fed Funds rate -- now 5.25% -- would be
an unwelcome development as it would reduce the relative attractiveness
of SP 500 ROE% at market value.
3) There are obviously a host of exogenous factors that could make things
better or worse, but factors 1-3 are the time honored critical ones.
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