Back in April 2012, University of Pennsylvania Wharton finance professor Jeremy Siegel, predicted that the Dow Jones Industrial Average (DIA) has a 50% chance of hitting 17,000 and a 75% chance that it will hit 15,000 by the end of 2013. The 15,000 mark has already been reached and surpassed. With the Dow now at 15,354, the average only needs to advance another 10.7% to end the year at 17,000.
Siegel's thesis is based on the relative cheap valuation of stocks and their behavior over time. In April 2012, the market had a P/E ratio of 13. Siegel said,
When you start at a 13 price-earnings ratio, get back in history, the future is much, much brighter. We've never had bad stock returns over the next three, five, 10 years when you start with a 13 P/E ratio, and that's the world of difference.
The market now sports a P/E ratio of 14, which is still below the long-term average P/E ratio of 15. This gives the market more room for growth even without corporate earnings growth according to Siegel. Siegel stated that corporate earnings growth would be an extra bonus for the stock market, but he implied that they are not necessary for the market to rally higher.
We're not seeing much negative news right now that would cause stocks to experience a significant sell-off. The jobs report for April was better than expected. 70% of companies reporting earnings in the first quarter of 2013 have beat estimates on their bottom lines. Overall positive news like this, combined with a continued quantitative easing strategy in the United States and abroad, has added fuel to the stock market. Historically low interest rates have investors pumping money into high yielding investments such as dividend paying stocks. This demand has also led to more stock price increases.
It is important to note that 75 companies have issued negative earnings guidance for the second quarter of 2013 with only 25 companies issuing positive guidance. It should be interesting to see if these companies do end up with lower EPS figures. If the majority of companies who reported lower EPS guidance actually have lower EPS figures for Q2, will that be enough to stop the current market rally? This will be a good test for Jeremy Siegel's thesis that the rally can continue without corporate earnings growth.
I think that the non-farm payrolls report, which is reported on the first Friday of every month, will be a key metric for the market. This report shows the change in jobs for the month being reported as compared to the prior month. If enough jobs are created, more people are employed, earning money, which contributes to the health of the economy. As the unemployment rate declines, more people are working, which leads to more participants in 401k and other retirement plans. This adds more demand for stocks, which comprise the mutual funds in retirement accounts.
Jeremy Siegel has been correct on the Dow 15,000 mark for 2013. If nothing significantly negative happens for the remainder of the year, it is likely that he'll also be correct on Dow 17,000 by the end of the year. I think that the market's continued rally will be fueled by investors seeking yield in dividend paying stocks, increased participation in retirement plans as more people enter the workforce, and a positive shift in market sentiment as the market continues reaching new highs.