It doesn't take much to stand out as a bull, given the widespread caution that defines most stock market predictions right now.
Just look at the latest views from David Kostin, a strategist at Goldman Sachs: He has now rocketed toward the front of the Wall Street pack with his forecast that the S&P 500 will rise to 2,050 by the end of the year, up from a previous target of 1,900.
While that sounds like a bold forecast of grand new heights for the world's benchmark index, it is actually quite tame relative to where stocks now stand. It implies an unremarkable rise of less than 4 per cent from Monday's close of 1,977.10.
What's more, Mr. Kostin peppers his updated outlook with many of the same concerns that defined much of his earlier market commentary this year – which is to say, he remains focused on limited profit growth and high valuations.
"U.S. equities soared 42 per cent during the past 18 months, but the stellar return borrowed heavily from the future," he said in a note. "We expect the equity rally will continue, but the trajectory will be shallow."
For investors who measure market sentiment using opinions from the pros, this is actually good news: With a notable lack of ebullience from market strategists, it is hard to see stocks approaching bubble-like proportions just yet.
The S&P 500 has risen a respectable 6.9 per cent in 2014. Most of the gains have come from earnings growth, which Mr. Kostin expects will continue to rise only modestly. While far more optimistic analysts believe earnings will rise 12 per cent in 2015, year-over-year, the Goldman Sachs strategist believes 8 per cent growth is more realistic.
During last year's remarkable 30-per-cent rally, investors looked beyond reported earnings and drove stock valuations higher, leading to a higher price-to-earnings ratio. Indeed, the multiple expansion accounted for about three-quarters of last year's rally.
Unfortunately, stock valuations are already above the historical average, at 16.5 times estimated earnings, according to Mr. Kostin, at a time when profit margins are also at record highs of 8.9 per cent. "In fact, the only time the S&P 500 traded at a higher multiple than today was during the 1997-2000 tech bubble when margins were 25 per cent lower than today," he said.
He added that the S&P 500 also looks expensive when you compare the index's enterprise value to sales and EBITDA (earnings before interest, taxes, depreciation and amortization). And when you use cyclically adjusted earnings over a 10-year period for the P/E ratio, the index is as much as 45 per cent overvalued.
Yet Mr. Kostin isn't running away from stocks, largely because they still look attractive next to other assets.
His colleague Jeffrey Currie is bearish on gold this year, as the economic recovery picks up speed and inflation remains subdued. Gold futures fell more than $30 (U.S.) an ounce on Monday, to $1,306.70.
More important, Mr. Kostin argued that stocks look good – even attractive – next to bonds.
Bond prices are expected to fall as yields rise with the improving economy and rate hikes by the Federal Reserve.
The 10-year U.S. Treasury bond yields less than 2.6 per cent, while the earnings yield for stocks (the inverse of the price-to-earnings ratio) is higher, at about 6 per cent. As the gap between the two yields moves toward the long-term average, the fair value for the S&P 500 rises to 2,080, Mr. Kostin said.
"Incorporating our lower 10-year U.S. Treasury yield forecast [of 3 per cent] with other valuation approaches, we lift our year-end 2014 S&P 500 price target to 2,050 [from 1,900] and 12-month target to 2,075 reflecting prospective price returns of 4 per cent and 6 per cent, respectively," he said.
Dull? Perhaps. But that's what bullishness looks like right now.