Why Stocks Are Primed to Move Higher

We have officially segued into a Bobby McFerrin market; don’t worry about sluggish economic growth, the sequester impact, slowed earnings growth and disappointing revenue, just be happy.

Last week JP Morgan’s (JPM) stock strategist upped his already bullish market forecast, and this week Goldman Sachs (GS) did the same, even though the PE for the S&P 500 has been expanding of late, and that index has sped ahead by about 30% since a low last June. As hedge fund manager Doug Kass (the credentialed bear at this year’s Berkshire Hathaway (BRK.B) annual meeting) remarked to the Wall Street Journal:

“While I sing a sad song of lackluster fundamentals, Mr. Market sings a happy song of global easing.”

Certainly the Federal Reserve’s continued easing goes a long way to explaining the surge in the S&P 500; as hedge funder Leon Cooperman succinctly put it in a Barron’s interview, "There is no effective alternative to common stocks." That alone can, at least in the short-term, keep the markets climbing. And it will be interesting to see if individual investors, who for the most part have been skittish about joining in, will up their ante. Absent a big change between now and June 30th, second-quarter 401(k) statements are going to show the great reversal: stocks are on a tear, and beloved bonds (the iShares Core Total US Bond Market ETF (AGG) is our proxy) have flatlined year-to-date.

^SPXTR Chart

^SPXTR data by YCharts

At the same time, the other prime wealth-effect barometer, housing, is on a tear. The most recent reading of the Case-Shiller Index of the 20 largest metro areas was up nearly 7% over the past year. When the next Case-Shiller reading comes out next week Zillow forecasts it will show a 9.8% increase. If we’re feeling better about our home values, we’re more likely to open up our wallets and spend a bit more. Including on our homes. Home Depot (HD) just reported same store sales were up 4.8% in the first quarter, and the average tab per shopper was 5% higher than a year ago. Home Depot expects more of that, as it raised both its earnings and revenue forecasts for the year.

And just as important, is what’s not going up. Though retail gasoline prices are up 10% year-to-date, today’s pump price is still about 1% lower than a year ago and 6.3% lower than the most recent peak in early 2012. (Another bonus was a fairly mild winter that spared households budget-busting heating bills.) As for inflation, well, pretty soon we might have to start sending out a search party as the core inflation rate has dipped to 1.72%.

While all indicators suggest there’s indeed more juice to this market run -- even the economics columnist for the measured New Yorker rejects (for now) the notion that we’re in a bubble -- that’s not to suggest it will be a smooth run. A pullback seems long overdue. Moreover, with the PE multiple rising, searching for the less pricey seems especially smart.

A central piece of Goldman Sachs’ upping its price target for this year and next centers on . . . wait for it . . . dividends. Specifically, Goldman Sachs expects S&P 500 http://ycharts.com/analysis/story/ten_leading_dividendgrowth_stocks_we_screen_the_aristocrats of 11% this year, and another 11% for 2014 as well, with info tech leading the way. Goldman Sachs expects tech sector dividends to increase 24% this year and 16% in 2014. Apple (AAPL) got a shout out, as did other big payers in the sector: Microsoft (MSFT), Intel (INTC), Cisco (CSCO) and IBM (IBM).

And for value minded investors, technology remains one of the cheapest sectors in the S&P 500. In terms of PE ratio, Apple and Intel remain the cheapest of the lot.

AAPL PE Ratio TTM Chart

AAPL PE Ratio TTM data by YCharts

Intel has managed to keep pace with the market’s rapid 17% gain so far this year. While Apple is a mirror image (having fallen 17% year to date) it is up more than 8% since its April 23rd release of first quarter results (during which Tim Cook promised a rollout of exciting new products would commence by the end of this year). That’s better than the 5.8% gain for the S&P 500. Perhaps Apple and Intel are in the early stages of moving out of the doghouse.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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