How Did Stocks Get So High?

Markets are not always rational. They are rarely—what’s the technical term?—bananas. But while a nearly unprecedented litany of depressing indicators should be devastating investor confidence the Standard & Poor’s 500-stock index is up 25 percent over the past 12 months and 14 percent in 2012. Close to $2 trillion has been added to equity values this year, and stocks have reached levels unseen since before the fall of Lehman Brothers Holdings and Bear Stearns. “This is about the strangest market environment I’ve ever seen,” says Donald Luskin, chief investment officer at Trend Macrolytics.

There are some strong forces propelling the market’s rally. Over the long term, stock prices tend to reflect corporate earnings. While S&P 500 per-share profits may decline 1.8 percent this quarter, they will rebound 11 percent in the final three months of the year, 11 percent next year, and 12 percent in 2014, according to analysts’ estimates compiled by Bloomberg, reaching record levels with every gain. Investors are also counting on help from the Federal Reserve, which is expected to start a third round of bond purchases to boost the economy. “The Fed has come out and said that things are weakening and that they’re willing to act,” says Gregory Peterson, managing director of investment research at Ballentine Partners. And Apple’s success—the stock is up 64 percent in 2012 through Sept. 11—is having an outsize impact on the indexes and the economy. With a market value of $620 billion, Apple represents 4.8 percent of the S&P 500 and almost 13 percent of the Nasdaq Composite Index, which has surged to a 12-year high. An analysis by JPMorgan Chase calculates that sales of the company’s iPhone 5, introduced on Sept. 12, could add as much as 0.5 percent to U.S. economic growth in the fourth quarter.