Bull Market Has Years Left for Shaoul on S&P 500 Valuations

While Wall Street strategists are the most cautious in almost a decade after the broadest U.S. rally on record sent price-earnings ratios up 19 percent, expanding multiples have preceded advances twice as often as they have retreats, data compiled by Bloomberg show. Since 1936, the S&P 500 has risen 69 percent of the time following quarters when valuations widened, the data show. The average return is 14 percent in years after more than 400 constituents climbed, according to data compiled by Strategas Research Partners.

One sign that things are becoming more popular is theyre more expensive, Michael Shaoul, the chief executive officer of Marketfield Asset Management LLC, which oversees about $19 billion, said in a Jan. 2 interview in New York. I would be quite surprised if this bull market didnt continue for another two to three years.

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Shaoul, whose annual average gains of 15 percent since 2009 have helped Marketfield beat 94 percent of its peers, said nothing happened in 2013 to halt the rally in equities. The S&P 500 climbed 30 percent last year, the most since 1997, as evidence of economic growth after five years of zero-percent interest rates overwhelmed signs that Federal Reserve stimulus is ending. The gauge was up 171 percent since March 2009 through the end of last week.

S&P 500 futures expiring in March gained less than 0.1 percent at 8:26 a.m. in London today.

All Up

Few stocks were left behind in last years advance as more than 90 percent of companies in the S&P 500 and about 85 percent of the Russell 3000 Index rose. A version of the S&P 500 that strips out weightings by market value increased 34 percent in 2013, bringing its return since March 2009 to 248 percent. Indexes of banks, small-cap stocks and transportation companies gained 33 percent or more last year while theNasdaq100 Index climbed 35 percent and theNasdaqBiotechnology Index soared 66 percent.

American stocks have never retreated after gains were as widespread in the past, Strategas data since 1990 show. The S&P 500 rose 13 percent the year after 427 companies increased in 2009, Bloomberg data show. When 402 stocks ended 1997 higher, the S&P 500 added 27 percent the next 12 months. The measure advanced 20 percent after 434 stocks rallied in 1995.

The rally was so broad, and a lot of that was driven by the start of the rotation from bond funds to equity funds, Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, which oversees $60 billion, said in a Jan. 3 phone interview. Its bullish for equities that there isnt an exceedingly narrow list of companies driving the market. Owning an equity proved a rewarding experience, and thats good for going forward.

Stock Rotation

Equity funds attracted more than $160 billion in 2013, the most since 2000, according to data on exchange-traded and mutual funds compiled by Bloomberg and Washington-based Investment Company Institute. Bond funds saw about $80 billion in withdrawals during the same period, ICI data show. About $260 billion had flown out stock funds the previous four years as more than $1 trillion was added to bonds.

Strategists from Brian Belski at BMO Capital Markets to Barclays Plcs Barry Knapp say the S&P 500 will climb 5.8 percent in 2014, according to the average of 20 estimates compiled by Bloomberg. The forecast is the smallest since 2005 and compares with an average projection of 11 percent over the last five years, Bloomberg data show.

Priced In

While valuation is by no means grossly overvalued, current levels suggest it may be more difficult for the market to continue its impressive run without equally impressive earnings growth, Belski, the chief investment strategist at BMO, wrote in a report last month. He predicts the S&P 500 will rise 2.8 percent to 1,900 by the end of the year, below the 1,955 mean estimate, data compiled by Bloomberg show.

Knapp, the head of U.S. equity strategy at Barclays, sees the same S&P 500 price, saying the market has already accounted for improving earnings. While Citigroup Inc.s Tobias Levkovich raised his target to 1,975 last month, the chief U.S. equity strategist says increased volatility may lead to a 10 percent drop during the first half.

Analysts who cover individual companies are predicting 116 stocks in the index will fall this year, the largest number of bearish forecasts in nine years, according to year-end price targets compiled by Bloomberg. The average index constituent will rise 4.8 percent in 2014, the least optimistic forecast since 2004. Alcoa Inc., Harris Corp. and U.S. Steel Corp. are among the companies projected to fall the most.

Fed Policy

Stocks may suffer as the Fed tapers its bond-buying program this year, according to Tim Hartzell, who helps manage about $425 million as chief investment officer at Houston-based Sequent Asset Management. The central bank said Dec. 18 it would cut its monthly purchases by $10 billion to $75 billion, citing an improving economy.

2014 is going to be a thin year in stocks, Hartzell said in a Dec. 31 telephone interview. The Fed has already announced that theyre removing the punch bowl. Thats the life of the party there, he said. Now is the time youd want to start trimming stocks and going into bonds and gold.

Expanding multiples show the benchmark gauge is attracting investors at a time when earnings growth rates are forecast to almost double. The S&P 500s price-earnings ratio rose three of the four quarters last year, the first time thats happened since 2008, data compiled by Bloomberg show.

Investor Confidence

Following 156 quarters since 1936 in which the S&P 500 P/E expanded, the indexs price rose over the next three months 108 times, Bloomberg data show. The average gain was 3 percent compared with 1.9 percent in all 308 quarters over that period.

How things played out in 2013, it was really just more a return of confidence, Walter Todd, who oversees about $950 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina, said in a Jan. 2 telephone interview. The economy is entrenched and picking up steam and that will bode well for earnings and multiples, he said, adding the S&P 500 may climb 10 percent to 15 percent this year.

Earnings for the full S&P 500 will climb 9.7 percent in 2014, almost twice the rate of 2013, according to analyst estimates compiled by Bloomberg. Profit growth will come as sales increase 3.8 percent, up from the 2.2 percent last year, and the economy expands 2.6 percent, faster than last years 1.7 percent, forecasts show.

Good Fundamentals

Where we are right now, the fundamentals are good, the earnings are really there and theyre likely to accelerate in a couple of key sectors, Shaoul said. Theres risks in this equity market, but there largely exogenous.

Analysts project Tenet Healthcare Corp. will rally 20 percent in 2014 after the valuation doubled. The operator of 77 hospitals and 176 outpatient centers rallied 30 percent last year and is estimated to increase profits 55 percent in 2014.

Boeing Co., the worlds largest planemaker, will climb 11 percent this year to $151.77 as earnings expand 13 percent, after the price-earnings ratio increased 62 percent last year. Shares of the Chicago-based company surged 81 percent in 2013, surpassing $100 for the first time ever.

Ralph Lauren Corp. shares traded for 22 times earnings at the end of the year, up 15 percent in 12 months. The retailer of its namesake brand clothing, which climbed 18 percent in 2013, will advance 11 percent this year. Earnings are forecast to expand 17 percent this calendar year as sales growth improves, according to analyst estimates.

You can question it all you want if there was enough reasoning behind the 30 percent gain this year, Robert Pavlik, chief market strategist at Banyan Partners LLC, which manages $4.5 billion, said in a Dec. 31 phone interview. Its been a terrific year and people should be very satisfied about how the market has reacted.