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All year long, the stock market has been batting its big green eyes at the world, drawing more and more people into its promising embrace. This is nothing new. For decades, North America’s most alluring bazaar for capitalism has been making multitudes of steadfast investors wealthy, while causing heartbreak and loss for many others — often, because of emotional decisions and the use of leverage.

But for all the headline-grabbing drama, when you get down to it, the stock market is simply an auction house for partial ownership in companies. As an owner, you share in the profits of a business through dividends and appreciation. Sometimes, the crowd is willing to bid higher and higher for a stake in these benefits, and sometimes, buyers are few and far between.

Pricing a bull market
Lately, buyers surround us, and we’re witnessing history repeat itself. New market highs are earned as the population, businesses, and earnings grow. New highs can go on for years, as they did in the 1980s and ’90s. Other times, the market hits a peak. and then doesn’t touch it again for a decade or longer, as was the case after 2000. Where this fate is concerned, the stock market’s price-to-earnings multiple is ultimately the largest determining factor.

So, where do we stand on the market’s P/E today?

• Recent SP 500 Level: 1,667
• SP 500′s current P/E on trailing normalized earnings: 18.6
• Average P/E at the end of a bull market: 19.7
• Five-decade (1949-2009) average P/E: 16.5
• Average length of a bull market since 1962: Four years
• Age of this bull market: Four years, two months

Source for P/E: SP Capital IQ; average data from Bloomberg; bull-market length data from Birinyi Data.

The numbers suggest that this bull market is nearing its end. Earnings growth, or the lack of it, will almost surely determine its short-term fate.

Analysts are notoriously awful at predicting earnings busts, never seeing them ahead of time. Currently, they expect the SP 500 in aggregate to achieve $108.52 in normalized earnings per share in 2013, up 4.6% from last year (with all the growth in the second half). Next year, they’re gunning for $116.72 in earnings per share, up 7.6% from this year. 

Let’s put some multiples on this. With the SP 500 at 1,667, we have:

• SP 500 forward P/E on 2013 estimates: 15.4
• SP 500 forward P/E on 2014 estimates: 14.3

If earnings growth resumes in the second half of this year and accelerates in 2014, as predicted, then this bull market could be with us at least a few more years. In fact, although the SP 500 trades at 18.6 times trailing earnings right now, it would need to increase substantially — by 37% — to reach the average bull market’s expiration price of 19.7 times trailing earnings by the end of 2014 — if earnings do indeed grow. 

But that’s the big “if.”

Over the past two quarters, earnings growth has been virtually nonexistent, and the average SP 500 company’s revenue actually ticked lower year over year for the quarter that just ended. In other words, resurgence in earnings growth is far from a slam dunk and, if the second half of this year disappoints, stocks will probably give back ground. After months of welcoming investors, the market could get cantankerous for the first time in a long time.

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As of April 30, Pro had earned 91.6% of the market’s gains since our service’s inception in 2008, while our real-money portfolio was only about 60% net long at the end of 2009, and about 70% net long on average since then. So, as an absolute returns portfolio carrying much lower-than-average risk, we still earned outsized returns of 10.9% annualized. The average hedge fund is nowhere close.

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23 May 2013
Last updated at 06:44 ET

Article written by
Linda Yueh

Chief business correspondent

• More from Linda

The Nikkei has jumped by more than 40% in 2013

If you invested in the Japanese stock market at the start of the year, you would be 40% richer.

You’re probably thinking about whether it’s time to take your money out. Seeing some worrying signs in the US and China might help make up your mind.

As the decline was broad and across all sectors – ranging from financials to manufacturers – it looks like a broad sell-off of stocks for investors to realise some gains.

That’s what is called profit-taking.

Japan’s stock market fell by about 7% which is the steepest decline since the tsunami and subsequent nuclear disaster of March 2011.

But the market is still up by more than 30% since the start of the year.

So those selling still made a tidy profit.

Those worrying signs

The strong growth of the Japanese equity market, and other markets, looks inconsistent as compared with the underlying weakness of major economies including the US, Germany and the UK. (See my earlier post). Cheap money from central banks has played a part, since stocks can be bought using borrowed money.

So, when Fed chairman Ben Bernanke said its cash injections may slow in the next few months if employment improves, it affects market sentiment. This was compounded by the minutes from the last Fed meeting where other members expressed a similar view.

Even though this isn’t surprising – the Fed had said it would inject $85bn in cash each month until the unemployment rate fell to 6.5% and inflation wasn’t too far off its 2% target – a stir has been caused by a sign that this point may be reached sooner than expected.

Plus, Japanese companies rely on export markets, especially that of its largest trade partner, China.

Nikkei 225 Index

Last Updated at 23 May 2013, 02:45 ET

And today an influential survey, the PMI indicator conducted by HSBC, suggested that Chinese manufacturing has contracted in May. The preliminary reading was 49.6, the first estimate below 50 in seven months. The market as seen in consensus forecasts hadn’t expected it.

They thought manufacturing expansion would slow to 50.4 but not contract. Negative surprises don’t usually help sentiment.

Considering that in April that same PMI measure indicated a slowing from the first three months – when growth dropped to its lowest in 13 years since the Asian financial crisis – it was another worrying sign for the world’s second largest economy.

Not just stocks

Other assets like bonds also declined. The yield, or interest rate, on 10 year Japanese government bonds hit 1% for the first time in a year, but then fell below that level again. As the yield is inversely related to the price of the bond, that means that the bond market fell as well.

The movement was so large that the Bank of Japan intervened to stabilise the market by injecting 2 trillion yen.

This could be part of the movement out of riskier assets, as there is a lot of Japanese government debt. Of course, the Japanese central bank is buying bonds to inject cash to reflate the economy.

But if so-called Abenomics, the large-scale cash injection and fiscal stimulus programme of prime minister Shinzo Abe, works and defeats deflation then prices would begin to rise and that would mean higher interest rates in the future. Or, actually a more normal interest rate because borrowing for 10 years at less than 1% is rather extraordinary.

Key signs

An important sign as to whether Abenomics is working and conditions are beginning to return to normal will be wages.

If firms are doing better, then they will pay higher wages. Higher wages will support price rises, so Japan can return to normal levels of inflation.

If that were to happen, then bond and stock markets would also begin to look a bit more normal.

For the rest of the world, stock markets may also begin to level off if money ceases to be so cheap. But, that could signal an improvement in the economy, which is ultimately what we would all like to see.

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By David Randall

NEW YORK (Reuters) – Japan’s white-hot stock market has investors crowding in, but there are a few reasons why you shouldn’t follow the pack.

It’s a temptation, of course. The benchmark Nikkei 225 index is up 50 percent for the year, more than any other developed market, and nearly triple the approximate 17 percent gain for the Standard Poor’s 500 stock index through May 21.

This streak prompted investors to put a net $9.1 billion into Japan equity funds and exchange-traded funds in April. In fact, that’s the bulk of the $9.9 billion investors added to all sector funds during the same month, according to Lipper data.

Yet investors might already hold more of Japan in their portfolio than they think. The average international mutual fund has 17.1 percent of its assets invested in the country, or nearly a fifth of the fund’s portfolio, according to Lipper, a unit of Thomson Reuters Corp.

Adding a Japan-only stock fund or ETF on top of that at a time when the market has already seen big gains might set the stage for larger losses once the market cools, analysts said.

The Japanese economy grew at an annualized 3.5 percent in the first quarter.

“People are clearly thinking that the monetary policy Japan has put into place has at least the likelihood of turning the economy around,” said Kate Warne, market strategist at Edward Jones. “But expectations have run a bit ahead of reality.”

Nevertheless, there are ways to benefit from Japan’s rising stock market without taking on concentrated risk. Here are two:

MUTUAL FUND STAKES

One big reason why investors in diversified mutual funds shouldn’t increase their stake in Japan is that their managers might have already done it for them.

The $33.6 million TCW International Small Cap Fund, for instance, has about 31.6 percent of its portfolio in Japanese equities, according to Morningstar data, nearly double its 16.4 percent stake in March of last year.

The $1.1 billion Wasatch International Growth fund, meanwhile, more than doubled its stake in Japan over the last 11 months. The fund now has about 15.5 percent of its assets in the country, according to Morningstar, up from 7.1 percent as recently as June of 2012.

(These figures reflect both new purchases on the part of fund managers and the rising value of assets they held prior to the market surge.)

Funds such as the $212 million Wells Fargo Advantage Asia Pacific Fund, the $992 million Oppenheimer International Value Fund, and the $4.1 billion William Blair International Growth Fund have all increased their Japanese weighting by seven percentage points or more during the last year as well.

Add it together and “it’s another reason to be skeptical of flavor-of-the-month or flavor-of-the-quarter funds,” said Bill Rocco, a senior fund analyst at Morningstar. “Ideally, you want a broad foreign fund with a manager who said last October: ‘Wow, I think there’s some real opportunity in Japan.’ And now they’re reaping the rewards.”

Investors might want to consider multi-cap core international funds such as the $17.3 billion Oakmark International Fund and the $8.8 billion Artisan International Value Fund. Both funds have 10 percent or more of their assets in Japanese stocks and have category-leading returns of an annualized eight percent or more during the last five years, according to Lipper data.

BROADER ASIAN PLAY

Any pickup in Japan’s economy will likely benefit Singapore, South Korea and China as well, so funds that invest broadly in Asia offer another way for investors to reap the rewards.

Kenneth Lowe, a co-manager of the $4.9 billion Matthews Asian Growth and Income Fund, said the fund hasn’t been adding to its overall allocation of Japanese stocks. Instead, the fund, which is up an annualized 14.4 percent during the last three years, is keeping about 10 percent in Japan, with the largest stake of the portfolio invested in China.

The fund’s largest positions are in companies such as Malaysian financial firm AMMB Holdings Bhd and Singapore based Ascendas Real Estate Investment Trust, which should benefit from the powerful combination of the region’s rising middle class and continued economic growth.

Lowe, who stresses his fund invests on individual merits rather than macro trends, said Japan’s rally could be sidelined if proposed reforms to the labor market and trade policies fail.

“We’re still not sure of what reforms will look like,” he added.

(Reporting By David Randall. Editing by Lauren Young and Andre Grenon)

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REUTERS/Brendan McDermid

At 10 AM EDT today, Federal Reserve Chairman Ben Bernanke will testify on the outlook of the U.S. economy before a Joint Economic Committee of Congress.

Along with the subsequent release of the minutes from the FOMC’s April 30-May 1 monetary policy meeting, due out at 2 PM, the Bernanke testimony is the main event on the calendar for markets this week.

Because the stock market rally that began in November has yet to see any sort of meaningful downward correction, it has lent to the sense that the market just keeps going up, undeterred by weak economic data and the like.

As such, the stock market will likely be a topic of interest for the JEC, and it may wish to put the question to Bernanke: are stocks in a bubble?

In a preview of the testimony, Miller Tabak Chief Economic Strategist Andrew Wilkinson identifies two things the stock market will want to hear from Bernanke, and how the Fed chairman may respond to a grilling on stocks:

There are two things the equity market would appreciate hearing from Mr. Bernanke on Wednesday. First, while progress is progress, it remains painfully slow. Such recognition will create the feeling amongst investors that quantitative easing is here for longer. Bond yields would decline in response while stocks would rally and the dollar would fall on the notion that it is surrendering its future yield advantage.

Second, for it to build on already heady gains – the market closed 1,000 points off its March 2009 lows on Monday – the stock market needs a green light from Mr. Bernanke. Any reference to future bubbles building in “certain” asset classes or financial markets will be cause for a sell off in stocks. However, the Fed has developed ‘asset patrol committees’ in the aftermath of the financial crisis whose role it is to monitor developments in financial markets and send up distress flares when unusual correlations begin. Thus far they have only spotted minor solar flares in some asset markets, but nothing to worry about.

If Mr. Bernanke is grilled on the topic of the advancing stock market, we expect he will explain it in terms of a revaluation of earnings potential as a consequence of several years of financial repression rather than blaming it on ‘irrational exuberance’. He has said it before and we expect him to say it again, the stock market is hardly overvalued despite its recent rise.

As we noted last week in a note, several Fed speakers have revisited the difficulty in pushing the flow of credit to would-be-homeowners – those with less than stellar credit. It does not make sense for Mr. Bernanke to upset the applecart despite the fact that equity traders seem to have adopted another mantra in May as they party like its 1999.

In short, anything but optimism from Bernanke on stocks would probably come as a surprise.

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It doesn’t seem like anything can stop the stock market freight train to new highs nowadays. But one strategist argued that even if equities went into a “bear market”—which he’s absolutely not predicting—they’d still be higher than last year’s June lows.

John Lynch of Wells Fargo Private Bank explained on “Squawk Box” Wednesday: “We could see conceivably—this is not our call—but it’s possible to see a 20 percent ‘bear market’ and we’d only go down to 1,330 on the SP [500].”

That’s still about “50 points higher than where we were last June and everyone thought it was Armageddon,” he added.

Again, Lynch stressed that he’s not calling for a “bear market.”

In fact, he said that “an argument can be made that the market looks stronger at 1,670 than it did at [SP] 1,600″ because of the switch from defensive sector leadership to cyclical leadership.

On Tuesday, the SP 500 Index and the Dow Jones Industrial Average closed at new all-time highs. And for the Dow, that marks the 19th straight Tuesday of gains.

“Many investors have continually asked if we’re going to hit a correction,” Lynch said. “Fortunately for investors [Fed] monetary policy provided this ‘put option’ for the market that’s prevented it.”

(Read More: Bernanke: Too Soon to Taper Bond Buys)

But for investors who’ve missed the rally, he advised, “Do not jump in—all in—at an all-time high.” He continued, “We’re encouraging our investors to look at a minimum of three, if not a six month period, where you want to enter the market accordingly in a diversified strategy.”

Mark Lehmann at JMP Securities agreed. “Piling in at an all-time high is a tough pill to swallow for some investors who have missed it. But again, I think the market has value in it. I think the width of the market is accelerating.”

“One part of the market that we haven’t talked about is the IPO tape, which has been very strong,” Lehmann said. “We don’t want individual investors piling into the latest IPO of the day, but some of the recent action in the IPO market bespeaks a higher [stock] market going forward.”

“For existing money,” Lynch said, “we’re trying to make sure that investors, if they for example are way overweight in the staples sector to re-balance out of those areas and try to participate in some of the gains [in] energy where they [might] have been underweight given the performance year to date.”

—By CNBC’s Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.

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The Swiss stock market began its trading week with a modest gain Tuesday, following its return to action following Monday’s holiday. The market was a bit subdued in early action, but climbed into positive territory in the afternoon, due to the strong performance of the U.S. markets.

Investors were cautious ahead of tomorrow’s events and they will be watching for clues as to when the Federal Reserve will begin to taper off its stimulus program. The Federal Open Market Committee is scheduled to release the minutes from its most recent meeting Wednesday and Fed Chairman Ben Bernanke will testify before the Joint Economic Committee of Congress.

The Swiss Market Index increased by 0.46 percent Tuesday and finished at 8,318.42. The Swiss Leader Index climbed by 0.20 percent and the Swiss Performance Index added 0.44 percent.

Sonova dropped by 1.1 percent, after the hearing aid manufacturer reported a lower annual profit. The company’s outlook was also viewed as disappointing.

Most cyclical stocks finished to the upside Tuesday. Geberit increased by 3.0 percent and Schindler gained 2.0 percent. ABB advanced by 1.5 percent, Sika gained 1.3 percent and Richemont added 2.7 percent.

The two pharma heavyweights, Roche and Novartis also provided support to the market. Roche climbed by 1.6 percent and Novartis gained 0.9 percent. Shares of Nestle finished unchanged.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

Market Analysis

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NEW YORK (AP) — The stock market turned higher Tuesday as investors banked on continued policy support from the Federal Reserve. Two big retailers also topped Wall Street expectations for the most recent quarter.

The Dow Jones industrial average rose 64 points to 15,399 shortly after 1 p.m. Eastern time, though trading volume was light.

“I think a lot of people are sitting on their hands waiting to see what the Fed says tomorrow,” said Michael Binger, senior portfolio manager at Gradient Investments in Minneapolis, Minn.

On Wednesday, the Federal Reserve will release minutes from its most recent policy meeting and Chairman Ben Bernanke will go before Congress to discuss his outlook for the U.S. economy.

Investors are looking for any hints that the Fed will ease back on its multibillion dollar bond-buying program, which has helped lift the stock market to all-time highs.

Stock indexes had wobbled between gains and losses in early trading, then took a turn higher after James Bullard, head of the Fed’s St. Louis branch, said the Fed should keep buying bonds to energize the economic recovery.

The Standard Poor’s 500 index gained six points to 1,672. The Nasdaq composite rose 11 points to 3,507.

J.P. Morgan Chase Co. gained 2 percent. Shareholders of the country’s biggest bank voted to allow Jamie Dimon to keep his two titles, CEO and chairman of the board. Some had sought to split the positions, a movement which gained momentum after massive losses tied to a single trader in London.

The bank’s stock rose $1 to $53.29.

Home Depot surged 3 percent, the best gain among the Dow’s 30 stocks. The retailer reported an 18 percent increase in quarterly income as the housing market continued to recover. Home Depot rose $2.18 to $78.93.

It’s been another solid earnings season for big companies, with corporate profits hitting all-time highs even as revenues barely rise.

Seven of every 10 companies in the SP 500 have trumped Wall Street’s earnings expectations, according to SP Capital IQ. First-quarter earnings are on track to climb 5 percent over the year before. Revenue is expected to rise just 1 percent.

In the market for U.S. government bonds, the yield on the 10-year Treasury note slipped to 1.93 percent from 1.96 percent late Monday.

In commodities trading, the price of gold fell $7 to $1,377. Gold has slumped 19 percent this year. Tame inflation, a stronger dollar and a surging stock market have made gold less appealing as an alternative investment.

Among other companies in the news:

— Carnival Corp slumped 5 percent, the biggest drop on the SP 500. The cruise-ship operator cut its earnings forecasts for the year late Monday as it wrestles with the fallout from high-profile incidents in which passengers have been stranded at sea. Carnival’s stock lost $1.92 to $33.40.

— Best Buy dropped 4 percent, after reporting a quarterly loss and sales that fell short of expectations. Its stock lost $1.16 to $25.65.

— TiVo gained 3 percent, or 44 cents, to $13.10. The digital video recording company narrowed its quarterly loss with the help of higher sales from more subscribers.

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NEW YORK (AP) — Reassuring comments from a Federal Reserve official and better earnings from two big retailers helped push the stock market higher Tuesday.

Stock indexes wobbled between gains and losses in early trading, then took a turn higher just before noon. That’s when news crossed that James Bullard, head of the Fed’s St. Louis branch, told an audience in Germany that the Fed ought to stick with its bond-buying effort to bolster the economic recovery.

“Those words were a salve for investors’ nerves,” said Lawrence Creatura, a fund manager at Federated Investors. Other Fed officials have recently talked about scaling back the program. “There’s a lot of uncertainty surrounding this issue. And uncertainty and investors aren’t always a happy match.”

The Dow Jones industrial average rose 52.30 points to 15,387.58, a gain of 0.3 percent.

The Standard Poor’s 500 index edged up 2.87 points to 1,669.16, a slight increase of 0.2 percent. Both the Dow and the SP are at record highs.

Many investors were already looking ahead to Wednesday, when the Federal Reserve will release minutes from its most recent policy meeting and Chairman Ben Bernanke will go before Congress to discuss his outlook for the U.S. economy.

“I think a lot of people are sitting on their hands waiting to see what the Fed says tomorrow,” said Michael Binger, senior portfolio manager at Gradient Investments in Minneapolis, Minn.

Binger said some investors believe the Fed’s support is the main reason the stock market has soared to all-time highs. If the Fed pulls back, they reason, the market’s epic rally would come to an end.

In other trading, the Nasdaq composite rose 5.69 points to 3,502.12, a 0.2 percent gain.

J.P. Morgan Chase Co. gained 1.4 percent. Shareholders of the country’s biggest bank voted to allow Jamie Dimon to keep his two titles, CEO and chairman of the board. Groups had pushed to split the two jobs, a drive that gained momentum from a multi-billion trading loss last year. The bank’s stock rose 73 cents to $53.02.

Home Depot surged 2.5 percent. The retailer reported an 18 percent increase in quarterly income as the housing market continued to recover. Home Depot rose $1.95 to $78.71.

Among other companies posting quarterly results, AutoZone jumped 5 percent. Better sales and shrinking costs helped the auto-parts company beat analysts’ earnings forecasts. AutoZone leapt $18.79 to $427.84.

It has been another solid earnings season for big companies, with corporate profits hitting all-time highs even as revenue barely rises.

Seven of every 10 companies in the SP 500 have trumped Wall Street’s earnings forecasts, according to SP Capital IQ. First-quarter earnings are on track to climb 5 percent over the year before. Revenue is expected to rise just 1 percent.

In the market for U.S. government bonds, the yield on the 10-year Treasury note slipped to 1.93 percent from 1.96 percent late Monday.

In commodities trading, crude oil sank 55 cents to settle at $96.16 a barrel.

The price of gold fell $6.50 to $1,377.60 an ounce, extending a slump that has knocked gold down 18 percent this year. Tame inflation, a stronger dollar and a surging stock market have undermined gold’s appeal.

Among other companies in the news:

— Carnival Corp slumped 4 percent. The cruise-ship operator cut its earnings forecast for the year late Monday as it wrestles with the fallout from high-profile incidents, which left passengers stranded at sea. Carnival’s stock lost $1.51 to $33.81.

— Best Buy dropped 4 percent after reporting a quarterly loss and sales that fell short of the forecasts of financial analysts who follow the company. Its stock lost $1.17 to $25.64.

— TiVo gained 2 percent, or 26 cents, to $12.92. The digital video recording company narrowed its quarterly loss with the help of higher sales from more subscribers.

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