Kostohryz: Is the S&P 500's New High Fundamentally Warranted?

NEW YORK ( TheStreet) -- The S&P 500, along with most broad-market index ETFs such as the SPDR S&P 500 ( SPY), SPDR Dow Jones ( DIA) and ProShares Q's ( QQQQ), made fresh all-time highs on the last trading day in March. Are such new highs fundamentally warranted?

On a one-month view, fundamentals do not seem supportive. On a one- to two-year view, fundamentals appear to be quite supportive. On a secular view, the outlook is more worrisome. Overall, the outlook seems supportive, when one focuses on the cyclical fundamentals that tend to drive equity returns over the course of a one- to two-year time frame.


Short-Term Fundamentals

Global growth seems to be slowing in various regions. Certainly, the recession in European nations, such as Italy and Spain, was accelerating even before the Cyprus crisis; the travails of that island nation can only be expected to cause further economic and financial troubles. Growth in Japan, Korea and Australia has been disappointing, perhaps even alarming. "Dr. Copper," an industrial metal whose price evolution is typically considered to be a predictive factor in many macro econometric models, has also been sending some cautionary signals regarding global growth prospects.

In the U.S., the short-term picture seems to have deteriorated somewhat in the past 30 days. Data on real income, consumer confidence, consumption and durable goods slipped a bit in February-March.

In terms of prospective earnings growth, recently announced profit disappointments by Oracle ( ORCL) and Fedex ( FDX) raise the possibility of a softer-than expected first-quarter earnings reporting period.

Thus, on a 30 day-prospective, it appears that leading and coincident fundamental indicators have not been particularly supportive of new highs.


Cyclical Fundamentals

I define cyclical fundamentals as referring to an entire economic cycle, which in recent times has generally encompassed between five to eight years. Here the fundamental outlook is generally supportive, at the current time.

First, trailing and forward 12-month PE ratios, as well as my own measure of a cyclically adjusted PE (not Shiller's PE10), look to be slightly above historical averages on a long-term secular basis. However, valuations are actually slightly below average, when we look at the historical record of typical valuations, at this particular point in an economic cycle.

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