PAR Model mid-month July update - the model continues to turn more positive on U.S. equities, with six-month expected return for the S&P 500 (SPY) of 5.1%.

The change of +2.0% since June 30th is driven by positive changes in valuation (mainly Price to Book), the ECRI Weekly Leading Index, and the price of crude oil.

The PAR Model is a factor model designed to estimate the expected equity return over a six-month period. The model is based on a dynamic multi-factor regression of the S&P 500 returns over economic, valuation and market variables. The factors are chosen each month as part of the model run, based on their statistical significance, from the set of 15 factors that have proven to be significant over time.

**S&P 500 6-m expected return: 5.1%**

**Recommended allocation: Overweight**

**As of June 30th: 3.1%**

**Change 2.0%**

**Significant Factors**

The P/E ratio is one of the key measures of index valuation in the model. It continues to extend a significant positive contribution to the model's expected return, at 0.9 standard deviations (S.D.) (see the chart above). This is partly offset by the negative effect from our proprietary measure of Earnings Quality, at -0.6 S.D.

The healthy trend in U.S. corporate earnings contributed to the below-average P/E ratio, and in turn, to its positive contribution to the model's expected return of around 1 S.D. in the last two years. Most recently, profit increased by 6.1% YoY in Q1-2012 (which was much higher than analysts' estimates).

Valuation improved slightly so far in July, with the P/E ratio dropping to 13.7. It remains very attractive by historical standards, being well below the five-year average of 15.6. This explains why the P/E provides a significant positive contribution to the expected return as part of the model (the green Contribution line on the graph below).

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.