Fundamentals Behind S&P 500 Rally Very Weak

The roller coaster ride up for the S&P 500 keeps moving higher.

Stock market rallies are great. I am certainly not against them, because, the higher they go, the higher the stock-picks we make in our financial newsletters go. But stock market rallies must have reasons for going up. A healthy S&P 500 stock market rally is composed of better future corporate earnings expectations, real economic growth, increased participation, and less uncertainty.

But this particular stock market rally is running on fumes and fear is creeping into the S&P 500 slowly. I can’t predict the exact date of the top, but I know that the current stock market rally can’t continue for too long within the current economic situation in the U.S.

Future earnings expectations from S&P 500 companies are low at the very best. We already know FedEx Corporation (NYSE/FDX) and The Procter & Gamble Company (NYSE/PG) have warned about future earnings growth. However, in spite of weaker earnings growth forecasts, optimism is high, and the stock prices of S&P 500 companies have certainly become more expensive.

The U.S. economy is facing a municipal debt crisis, a student debt crisis, out-of-control government borrowing, money printing, high unemployment, a falling greenback, and rising inflation.

And the fear is not going away. There was a net outflow of $5.08 billion from the U.S. domestic mutual funds in the last week of September. The outflow of money from mutual funds has been increasing since the last week of August. (Source: Investment Company Institute, October 3, 2012.)

The expectation of another round of quantitative easing (QE) by the Federal Reserve, QE4, could be the only reason the S&P 500 stock market rally is continuing. And it’s important to note that QE3 was open-ended—there is no cut-off date for QE3.

We are in one of those rare times in history when the stock market and economy are going in very different directions. Don’t be fooled by the stock market rally and ever-increasing S&P 500. It’s all going to end soon.

Where the Market Stands; Where it’s Headed:

There isn’t much about the stock market I haven’t already said above. We are near the end of a bear market rally in stocks that started in March of 2009.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in Profit Confidential, June 23, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.