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The hidden reason why the rally has legs

The hidden reason why the rally has legs

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The hidden reason why the rally has legs

The hidden reason why the rally has legs
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This chart explains why higher rates are coming

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Stocks are continuing to rally, but it may not be about the Fed anymore.

Conventional wisdom has held that recent gains in the stock market are fueled by an easing of monetary policy from the Federal Reserve, and higher earnings through cost-cutting, but lacking corresponding revenue growth.

However, thus far, about 30 percent of the companies in the benchmark S&P 500 index have reported their second-quarter results—and the numbers could be telling us that there’s more to this rally. The revenue growth rate has been 3.4 percent, with 68.5 percent of companies beating Wall Street estimates (comparedwiththe historic average of 63 percent).

(Watch: Stocks mostly up on earnings; record close for S&P)

For Erin Gibbs, equity chief investment officer at S&P Capital IQ, this indicates that the long rally in stocks still has legs.

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“There’s certainly some truth to it being pushed by the Fed,” said to Erin Gibbs, who has about $11 billion in assets under advisory. “But again, when you do look at revenue growth, right now we’re tracking at about 3.5, maybe even 4 percent revenue growth for the year. This is almost twice the rate of the revenue growth that we had for last year. This is good.”

Gibbs also won’t dismiss earnings growth. “We’re looking at about 8 percent for this year and almost 12 percent for next year,” she said. “Going forward, we should be looking at low single-digit appreciation in the market just to keep up with earnings growth.”

Though she sees the potential for a “healthy” 5 to 10 percent pullback in the S&P 500 over the next 12 months, Gibbs believes it will have good growth over the course of the next 12 months as well and said, “for the long term, [it’s] definitely going up.”

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However, Richard Ross, global technical strategist at Auerbach Grayson, is more wary of the market based on an 18-month chart of the S&P 500.

(Watch: Inflation is about to fall—and fall hard)

“It’s been said that the only thing man learns from history is that man learns nothing, which is why I focus on the charts to avoid those pitfalls,” said Ross, a “Talking Numbers” contributor. That history includes the S&P 500 staying well above its 150-day moving average and moving up almost 50 percent in the past year and a half without much volatility. “Not unprecedented – and it doesn’t mean we stop here – but just extraordinary.”

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But it’s in the longer-term chart of the S&P 500 that Ross finds the real issue. He is worried about the steep, upward slope of the index since its 2011 low.

“It’s been over four years since we had a weekly close below the 150-week moving average,” he said. “Even that shorter-term 50-week moving average, it’s been almost two years since we closed below that level. So history is coming up against this market in spite of these very strong fundamentals, very strong technicals, and very strong confidence. Some of those attributes of a bull market can also be the arrow and the quiver of the bear as well.”

Though many believe the S&P 500 is likely to reach the 2,000 level soon, Ross isn’t sure about where the index goes from there.

“I’m still very skeptical based in large part on the longer-term chart, [though] not so much on the short-term technicals which remain strong,” he said.

To see the full discussion on the S&P 500, with Gibbs on the fundamentals and Ross on the technicals, watch the above video.

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