Rally Runs Its Course

At the same time, the sovereign debt crisis will drag on, with June being another crucial month in Greece (and elsewhere in the eurozone).

As I wrote late last week:

The challenge in the U.S. is that monetary policy has done almost all that it can do and the onus in now on fiscal policy, which will require a less divided and more cooperative Washington, D.C. Slow but positive growth in a muddle-through backdrop of +2% real GDP growth remains my baseline expectation.

The challenge in Europe is for central bankers and leaders to get back in front of the monetary curve (which they have now fallen behind).

Time is of the essence. The market is temporarily losing the trust that it's trying to win back, as individual and institutional investors have continued to de-risk. We see this in continued outflows out of domestic equity funds, inflows into fixed-income funds and record unfavorable ratings for our politicians (Republicans and Democrats).

2012 Might Be a Back-End-Loaded Year

Given the magnitude of the market's rally since the close on June 1, the ambiguity seen in recent domestic economic releases and the continued economic pressures and issues (and heavy economic lifting ahead) in Europe, I would expect stocks to mark time in the weeks ahead.

Nevertheless, for now, based on the four possible scenarios, my fair market value calculation for the S&P 500 (1455) is unchanged (representing about 9% upside).

I expect my S&P price target to be realized but that the 2012 investment year may be back-end loaded.

My base line case (scenario No. 4 with a 65% probability) is still in place, providing 15% upside to the S&P from current levels:

Scenario No. 4 -- Muddle Through (probability at 65%): The U.S. muddles through, with 1.5%-2.25% real GDP growth, and the European economies suffer a modest (but contained) business downturn. China's and India's economies grow in line relative to consensus forecasts. There is no further quantitative easing. Obama regains the White House, and the Republicans control Congress. The fiscal cliff is reduced by half (to $275 billion). S&P 500 profits for 2013 trend toward a range of $107-$109 per share as some modest margin slippage occurs (coincident with escalating inflationary pressures). Stocks, valued at 14.25x under this outcome, have 15% upside over the next nine months. S&P target is 1540.