Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Can the Rally Continue? Here's the Evidence

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

It was another good day for stocks, as the Dow (DJINDICES: ^DJI  ) and the broader S&P 500 Index (SNPINDEX: ^GSPC  ) gained 0.49% and 0.15%, respectively. Both indexes set new five-year highs in the process.

S&P 500: Looking back and looking forward
Closing at 1,494.81 today, the S&P 500 is now nipping at the heels of the 1,500 mark, which it has only breached during two periods: March-April 2000 and May-Dec. 2007. Are there any lessons to be learned? The following table describes the environment at the starts of those periods against the current environment:


March 15, 2000

May 3, 2007

Jan. 23, 2013

S&P 500 Closing value




P/E, Trailing-12-month EPS*




P/E, Cyclically adjusted




EPS growth rate, trailing 4 quarters*




GDP Growth, Trailing four quarters




Unemployment rate




*Based on operating earnings per share. Source: S&P Dow Jones Indexes, Robert Shiller, BEA, BLS.

The economic backdrop
In 2000 and 2007, we were at the tail end of two of the five longest periods of economic expansion since the 1850s. Today, with the Great Recession having ended in June 2009, we are still some ways from reaching even the average length of post-World War II expansionary cycles (59 months).

In 2000 and 2007, earnings growth had been strong when the S&P 500 broke 1,500 (although it had begun to slow in 2007). Earnings growth has been very strong coming out of the 2008-2009, but it slowed sharply last year. Expected earnings-per-share growth for 2012 is just 2.5%, down from 15.1% the year before. However, I don't expect to witness a "cliff dive" in earnings, which is what happened post-2000 and 2007. Although current estimates for EPS in 2013 and 2014 look unrealistic, some contraction is certainly possible.

Stock valuations 
Whether on the basis of trailing-12-month earnings or cyclically adjusted earnings, stocks are much cheaper now than they were in 2000 and 2007, which is precisely why we're knocking up on a level that we first witnessed nearly 13 years ago (cyclically adjusted earnings are the average inflation-adjusted earnings per share over the prior 10 years.) While they don't look wildly cheap, stocks are primed to deliver to better returns from here than they did following the two prior periods (thankfully!).

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2212100, ~/Articles/ArticleHandler.aspx, 9/25/2016 11:55:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes