Kass: A Deeper Dive Unearths the Ugly

All in all, I continue to see potential economic risks to the downside, providing still another hurdle for corporate profits (the mother's milk of the stock market) to meet rosy expectations.

My baseline expectation (of slightly below $100 a share) envisions first half 2013 coming in slightly below the range of the last five quarters, as the fiscal drag begins to take hold at a time when corporate pricing power is imperiled. Margins have held up relatively well, but we must continue to be vigilant in monitoring prices paid, labor costs, inflationary and raw materials pressures and interest rates, among other factors influencing margins.

The bottom line is that while 2013 consensus S&P profits (top-down) are about $107 a share, I expect a more challenging earnings landscape in the year ahead, with $100 a share or even less more likely to be closer to actual results.

Should $100 a share turn out to be actual 2013 S&P profits, down from $101-$102 projected in 2012 and consensus of $107 a share, the expectations of higher stock prices over the balance of the year will rest chiefly on a revaluation upward in P/E multiples (from nearly 15x today).

I continue to argue (so far incorrectly, at least measured by the market performance) that while 15x is in line with the last five decades of valuations, it is not undemanding given the secular headwinds to growth around the world described recently in "A Wolf in Sheep's Clothing." These include:

• an aging market and economic advance;
• unsustainable fiscal policy;
• the earnings cliff that is upon us;
• the interest rate cliff that may lie ahead;
• the uncertainty of a reallocation out of bonds into stocks;
• Washington does not instill confidence;
• a spent-up, not pent-up, consumer;
• diminishing policy alternatives; and
• volatile valuation.

In summary, despite money flows providing a continued and persistent rise in stock prices since year-end (let's call this The Tepper Liquidity Argument), the earnings and revenue cliffs are growing more visible, at least to this observer.

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