The S&P 500 index passes 1,500. The Dow Jones closes
above 14,000 for the first time since the financial crisis.
Individual investors start returning money to the stock
As encouraging as these stories are, headlines alone
dont make the case that U.S. equity markets will continue
plowing ahead. But we think theres plenty of evidence
that 2013 could be the fifth consecutive year that equity
investors climb the wall of worry.
There are still big-picture risks to get hung up on
thats been true for years. Lately the potential drag of
U.S. fiscal austerity seems to have displaced Europes
sovereign crisis and the China slowdown as investors
biggest worry. But despite the preoccupations, stocks finished
on positive ground in 2009, even coming off a brutal, multiyear
tailspin. They were up again in 2010. And in 2011. And in 2012.
Four straight years of positive returns. Volatile, yes, but
Stocks must be getting tired of climbing by now, we hear
people say. Its time for the market to take a rest
or a fall. But when we cut through the emotion to look at the
fundamentals, we see promising signs that equity markets have a
lot left in the tank.
Home prices have been rising, and new-home activity has been
improving. Rising home prices can be a big boon to consumer
confidence by shoring up their net worth. Its a shot in
the arm for banks too. And improving new-home construction
should help support more job growth.
The run-up in the euro in the second half of 2012 has helped
too, bolstering U.S. corporate earnings. Thats because
multinational companies with substantial overseas operations
are able to translate non-U.S. earnings back into U.S. dollars
at a more favorable rate.
Corporate earnings have been at record levels and are
still growing. Earnings per share for the S&P 500 index
should check in at about $103 for 2012 a new high.
Dividends, in terms of total dollars paid out, are also at an
all-time high and look to be growing faster than earnings. The
dividend yield on stocks still stacks up well against bonds.
And theres the upside potential.
Based on our assessment, equity valuations still look like a
good deal even after an impressive four-year rally. As
of late February, as seen in the display below, the S&P 500
was trading at a price-earnings (P/E) ratio of about 14 times.
Compare that with the yield of about 2 percent on the 10-year
Treasury bond, which works out to an earnings
multiple of roughly 50 times.
We think investors will increasingly see this as evidence of
a good opportunity to return to equities. There have been signs
of money in motion: In January 2013 investors put more than $20
billion into U.S. stock funds. That hardly offsets the huge
outflows in previous years, but its a promising sign. In
our opinion, more institutions could also up their equity
allocations after cutting them to well under 50 percent over
the past decade.
All told, these factors seem to make the case for investors
maintaining a strong foothold on their way up the wall of worry
It may not be a straight path, as weve seen with some
of the recent market swings, but were pretty confident
theyll keep climbing.
The views expressed herein do not constitute research,
investment advice or trade recommendations and do not
necessarily represent the views of all AllianceBernstein
Kurt Feuerman is chief investment officer Select
Equities at AllianceBernstein.