The S&P 500 continues registering highs for the record books. Yet, the benchmark is reaching new peaks with less participation from its constituents.

Consider the chart of the Bullish Percentage Index (BPI) for the S&P 500. Typically, a stock market bull is at its healthiest when the majority of companies are moving higher in established uptrends. Most of the highs over the last 9 months – September, November, December, March, April – experienced breadth readings of 75%. Today’s bullishness? 63.8%.

Since 2011’s euro-zone crisis, the singular threat to the bull market’s well-being came in October of last year. Stock market volatility was soaring as the third iteration of quantitative easing (”QE 3″) had been wrapping up. Similarly, investors were rushing into the perceived safety of government bonds all around the globe. Then came the moment when U.S. stocks were approaching the correction mark of 10% off the top. That’s when the U.S. Federal Reserve blinked. St. Louis Fed President James Bullard publicly announced that quantitative easing could always be revived or extended. QE 3.5? QE 4? Stocks rocketed in a matter of minutes, recovering lost ground and claiming new territory on what many have dubbed the “Bullard Bounce.”


Perhaps ironically, the Fed has not actually raised borrowing costs in nine years. And it has been six-and-a-half years that the central bank of the U.S. has kept its target lending rate near zero percent. During those six-and-a-half years, every asset under the stars (other than cash equivalents) has appreciated handsomely. And why wouldn’t risk assets gain in value when money usually flows towards anything greater than a 0% return.

The question nearly every pundit, money manager and steward is asking at this point is what will transpire when the Fed hikes overnight lending rates for the first time in nine-plus years. For instance, analysts at Bank of America have been conspicuously bearish with the following lose-lose summertime scenarios: (1) The broader economy improves, giving the Fed ammunition to raise rates, ultimately causing stock market volatility and borrowing cost instability, or (2) The broader economy does not improve, and the slowdown in corporate earnings results in exorbitantly priced stocks moving to obscenely priced levels.

As bearish as B of A has come across, Goldman Sachs analysts have been even more cautionary. They noted that the forward P/Es for every single sector of the S&P 500 resides at cyclical peaks and that the median stock in the S&P 500 trades in the 99th percentile of historical valuation for forward P/Es. Their conclusion? Expect marginal 2015 gains on stock buybacks and dividends alone.

If one combines the assessments of both Goldman Sachs and Bank of America, one recognizes that the “borrow-n-buyback loop” that has supported stocks for six-plus years may face significant headwinds going forward. Up until this point in time, U.S. corporations have bought back more than $2 trillion of their own shares through borrowing at ultra-low rates. The borrowed money could have been spent on future growth through research/development, physical facility upgrades, better products/services or more meaningful hiring. Alas, all that one can say is that corporations do not trust the economy at large, preferring fortuitous borrowing terms to lower shares in existence and prop up the perception of the profitability per those shares. Still, if buybacks are the reason for stock prices moving higher (a la Goldman Sachs) and the economy should demonstrate improvement in the months ahead (a la Bank of America), one would surmise a combination of less borrowing at higher rates as well as less buybacks as companies invest capital in future growth.

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