SPX Index on a yearly basis

Price Source: Bloomberg

Although we have not quite finished the first quarter, it is obvious that the broad market is off to a fast start this year. A great deal of that performance was attributable to the stellar rise of Apple shares but there has also been a healthy serving of general improvement in the economic prospects both in the US and Globally.

The question one has to ask is: how much longer can the market run?

To answer that, one must consider what is driving the market. And, in general, the drivers are generally positive and sustainable. Of particular interest is the strength in Housing and Banking for which we can take XHB (chart) and IYF (chart) as proxies. If these two related sectors are showing signs of recovery, there is hope that the great American Consumption Machine can be cranked up to its former glory.

Looking at the S&P 500 earnings breakdown, the only “fly in the ointment” is the estimate that cashflow is due to drop (down 10.9%) even though earnings are still bounding forward (up 8.8%) in 2012. However, one should note that much of the discrepancy will be due to banks writing back unused loan loss reserves (a plus for earnings but a non cash item) and increased dividend payouts (negative for cash flow but a good thing for shareholders). These are to be expected and even welcomed as the recovery slowly gathers some momentum.

Click table to see full sized

SPX Earnings Table

The forecasts for 2013 and 2014 are probably too “straight-lined” to take seriously at this point. Around half the earnings on the S&P 500 are derived outside the US so they are still susceptible to troubles in Europe or China. However, it is fair to say that most of the potential bad news appears to be in the market. It will take a serious shock event (Iran, perhaps?) to knock the markets at this point.

So, for the next few weeks, there is little reason to be concerned that the main indices have burst out of the gates a bit faster than in the past few years. The Fund King System numbers are running in the teens for most risk assets with some sub sectors reaching into the 20’s and 30’s.

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