A Fully Valued Market

excerpt from this week's "Sectors and Styles Strategy Report":
The huge disconnect continues. As noted in last week’s report and in several blog postings, the financial markets are signaling not just economic stabilization but a robust (V shaped) recovery. Whether this comes to pass remains to be seen. However, very supportive at and above consensus macro economic reports strongly suggest that earnings expectations will do more than stabilize – they should rise in the coming weeks and months. While such action will provide the real economy results to the markets’ expectations, much of the value has been realized as noted in the three valuation models used (page 2).

The plus side of the equation is the anticipation of more Mega Trend bullish signals (pages 4 and 5). However, (from a fundamental analysis perspective) unless one believes that a P/E greater than 15 is appropriate, then stocks are likely to enter more of a trading range with rotation and sector selection being key.

Here’s how the full value argument plays out:

15 times $70 = 1050
1050 minus 940 (current S&P level) = 110
110 divided by 940 = 11.7%, which is right around the historical return for large cap stocks of 12%.

Hence, fair value has arrived. Unless, of course, higher earnings and/or higher P/Es are expected. Such a view is not held here.

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