European monetary policy: Europe's central bank has lost its obsession with inflation and austerity and has begun to pay more attention to the capital markets and economic growth.
Commodities: Commodity prices are falling year over year (by 15% to 20%). A year ago commodity prices were rising. Even the price of oil has risen less than experienced in 2010-2011. (It rose by 75% from summer 2010 to May 2011.)
Banks: Banks have materially recapitalized and have passed stringent stress tests.
Balance sheets: Corporate balance sheets continue to improve and remain rock solid. Debt is low vs. the same time a year ago and liquidity is higher.
Investor sentiment: Investors remain risk-averse. Unlike last year, investors are no longer aggressively positioned toward economic growth or markets. Inflows into domestic equity funds are lower through the first four months in 2012 compared to the beginning of 2011, and hedge funds' net long exposure is lower this year than a year ago.
Valuations: Valuations remain subdued, and the earnings risk premium is still elevated.
Europe: European stress indicators are lower, reflecting a ring-fencing of the debt problems and facilities that have been put in place to insure funding needs for the next few years as well as improving current account balances in Italy, Spain, Greece and Portugal. The cost of interbank lending risk is low and falling -- it was rising last year -- and short-term note yields in Italy and Spain are well off their highs.
Black swans: In 2011 exogenous events negatively impacted worldwide growth. Thai floods and the Tohoku earthquake disrupted supply chains and hurt sales and resulted in nearly $100 billion of insurance losses.
With the month of May upon our doorstep and with the year nearly half over, I am now replacing the previously projected four 2012 scenarios with new 2013 economic, corporate profit and stock market outcomes in my S&P 500 fair market value calculation.
Based on those changes, I have increased my calculation of the S&P 500's fair market value from 1360 to 1485, or 6% above the cash level at last Friday's close of trading.
In looking at these four new outcomes for next year, I am making the following changes this morning: