- Is the economy expanding? Yes, but the latest quarter at +1.8% has some investors worried that the engines of growth have stopped. I am not in that camp because most aspects of the slowdown are likely transitory and we will get back to 2-3% growth in subsequent quarters. Most other top investment strategists are on board with this outlook.
- Are US corporate earnings beating expectations? Yes. During the first quarter earnings season, the average S&P 500 firm has beaten estimates by 4.6%. Plus four companies are topping estimates for every one that misses. Most importantly, 50% more companies are receiving increased estimates for the future than lowered estimates. That is the clearest sign of earnings strength for stock investors to notice.
- Are stocks reasonably priced? Yes. The 2011 EPS estimates for the S&P 500 currently stand at $97 per share and rising. Divide that by the level of the index, 1352, and it means the market is trading at a PE of just 13.9. That is not dirt cheap, but far from overpriced. At this stage of the bull rally we should be seeing PE’s of around 15+.
- Is there cash on the sidelines? Yes. Even after this two-year run-up in the market, there are still tons of investors sleeping on mattresses stuffed with cash. And given a recent Flight to Safety trade, more money has moved out of stocks into bonds and cash. So yes, there is plenty of cash on the sidelines to fuel the market higher when more investors come around to seeing the viability of all the good fundamentals discussed above.
Now it is just a waiting game. And during that time the market may indeed go lower. Then at some unspecified time, it will head higher once again. If you are on the sidelines when that next bull run takes place, then you'll miss out. For myself, I can suffer the “slings and arrows of outrageous fortune” in the short run if the fundamentals point to more gains in the long run. So I will sit tight. You need to make your own call. We’ll compare notes of who did better down the road.