Updated from 3:16 p.m. ET to include additional information on the performance of the major U.S. equity indices in the past week and year-to-date.
NEW YORK (TheStreet) -- With every passing positive session, it becomes more difficult to question the legitimacy of the current rally in stocks. Maybe it's appropriate now to switch gears and think about what could come along and derail this train.A weak read on consumer sentiment aside, few would argue the economy isn't on reasonably solid footing right now with the employment picture improving, inflation in check, and even housing percolating a bit. The Federal Reserve acknowledged as much earlier this week, sparking Tuesday's surge in the major U.S. equity indices that's led to all these big, round numbers being conquered. "Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately," the latest statement began, omitting a reference to "slowing global growth" that was included in January. "Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance." So what's to worry about then? Higher gasoline prices could be problem, potentially prompting consumers and businesses to slow spending. Greece is out of the woods for now but it's not like the region's problems are solved or the prospect of a recession in Europe is off the table. The thing is though, these factors are well known and investor appetite for equities hasn't slowed nary a bit. What may be more helpful is to get a bit more basic, and ask whether corporate earnings growth in 2012 is going to support continued gains for stocks. UBS, which has a year-end target of 1475 for the S&P 500, weighed in on the subject earlier this week. "[W]e expect the market to push higher over the remainder of 2012," the firm said in a research note on Monday. "However, the underlying dynamic driving stock prices is likely to shift. More specifically, we believe that the recent liquidity-driven bounce has most likely run its course, and that earnings will lead stocks higher in coming months, with P/E expansion providing only modest support." Now the exodus out of bonds on Tuesday following the Fed's statement may have provided a bit more near-term liquidity, but the premise is still valid. One anomaly of this rally has been that fourth-quarter earnings season was very ho-hum, and expectations for the first quarter, which ends in two weeks, have been dropping. According to the latest data from Thomson Reuters, analysts are currently looking for earnings growth from the S&P 500 of just 2.8% for the first quarter, down from projections of 5.5% as of Jan. 3 and 10.2% as of Oct. 3. That's right; over the same span that the S&P 500 has logged a 25%-plus gain, pushing to close above 1400 on Thursday for the first time since June 2008, earnings expectations have steadily sunk.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV