Breakout

4 Catalysts to Spark an S&P 500 Rally to 1,500

Jim Paulsen, chief investment strategist at Wells Capital Management, is sticking by his year-end target of 1,500 on the S&P 500. He's zeroing in on four main catalysts that could spark a rally in the second-half of the year.

First up is Europe. Yes, Europe. Despite the market selling off on the latest round of concerns that nothing will emerge from another European Summit at the end of this week, Paulsen says we've seen this before and it's simply not the crisis it was once considered. He calls it more of a "chronic problem" that will be with us for the next decade, rather than a full-blown imminent threat.

"We've seen how this works out, the Euro fears flare, the market sells off, then they calm down and we go on to new highs," he says. "So rather than Europe fears flaring as a sell signal, I think what it has represented for the last two years is a good buying opportunity."

Second, Paulsen is as bullish on the U.S. economy as it gets these days. In his view, investors are too focused on China and Europe, and overlooking underlying strengths domestically. While overseas economies matter, he believes this year's U.S. growth data has been overstated, understated, and is now balancing out at about 2.5%. Paulsen ticks off several economic stimulants that could push growth as high as 3%, including historically low mortgage rates, the weak dollar, falling gas prices, and low inflation.

Further, according to his research, those that ignored the Euro crisis since January 2010 and held long positions in the broader market have seen an annualized return north of 10%.

Third, Paulsen points to emerging market economies.

"To me the biggest risk we face is not Europe, it's a recession in the emerging world. If that happens I think the global recovery is over," he states.

But Paulsen sees this as a low probability risk due to accommodative policy measures taken last Fall that will ultimately fuel those key economies to higher growth levels. He believes we'll see evidence of China's slowdown bottoming by the start of the fourth-quarter.

"If we see the emerging world reaccelerating and the U.S. growing 2.5 - 3%, I don't think investors are going to care about Europe by the Fall time," he says.

Finally, Paulsen points to earnings multiples. In his latest research note he cites the following:

Trailing 12-month earnings per share are now about $100. Therefore, the price-earnings multiple (PE) on trailing earnings is now slightly less than 13 times and the PE based on year-end consensus estimated earnings is currently less than 12.3 times.

"I think it's cheap," states Paulsen confidently. "We've never in the post-War era had this low of multiples when interest rates and inflation were also this low."

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