Let's start by looking at US based factors that should impact the S&P500.
1. The US economic data coming in has been quite decent. The initial jobless claims are at the lows. We all know the issue with the US unemployment figures, but the trend is unmistakable.
|Initial Jobless Claims (Bloomberg)|
2. US equity valuations look attractive on a historical basis. The next chart shows the S&P500 P/E ratios, both trailing and projected plotted over time. The last time we were at these levels was in early 2009.
|PE ratios (Bloomberg)|
4. Commodity prices, particularly food and energy have come off sharply. Corn, wheat, cotton are near recent lows. This should be a positive for both the US consumers and many corporations. Having access to abundant cheap domestic natural gas should be helpful as well. The chart below shows the CRB commodity index.
|CRB Commodity Index (Bloomberg)|
|Source: Goldman Sachs|
Now let's consider the developments in Europe that have been holding down US equity valuations.
6. Europe has gotten serious about their fiscal integration plan. France and Germany are driving the process and the eurozone is on board - at least for now.
7. We had two critical auctions - one for Italian bonds and one for Spanish bonds. The yields are high, but these nations were able to sell all the debt they planned and as far as we know the debt was sold to private investors. That gives the eurozone hope that these countries can in fact roll their debt without the EFSF, the ECB, or the IMF - at least in the near-term.
8. The upcoming sovereign downgrades by the S&P have been clearly telegraphed to the markets. And now with the auctions out of the way, the ratings may actually come in better than expected given the results.
9. Central banks have shown a willingness to provide unprecedented support to financial institutions.
Clearly tremendous risks remain and we may yet revisit the "dark days" of September. But in the near term the overall picture looks positive and the S&P500 has a "green light" to rally.