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Why the highs could be in for the year

Talking Numbers

If you're waiting for the benchmark S&P 500 index to hit 2,000, you may not be alone. In fact, there may even be a scientific reason people are looking at the S&P 500 reaching 2,000.

Four years ago, researchers from Booth School of Business and The Wharton School found that people strive to reach round numbers. Devin Pope and Uri Simonsohn examined four million SAT exams to find that students who didn't receive a round number score were more likely to retake the exam than those who did. Baseball players' batting averages were four times more likely to end with a rounded average than one within a minute fraction of one.

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But, markets aren't driven by round numbers. Or, at least, not entirely. There are some real numbers behind them. And, CNBC contributor Gina Sanchez, founder of Chantico Global, says the index's earnings are going to keep it from reaching the 2,000 level. As it now stands, the S&P 500 currently trades at about 15 times its forward year's earnings. The average price-to-earnings (P/E) multiple for the past 10 years has been 13.9. 

"I don't think we're going to get to 2,000 this year," says Sanchez. "The issue that I have with 2,000 is the P/E that it would take to get us to 2,000 – given what we're expecting for earnings – is just too high relative to where sales growth is."

Sanchez says earnings growth over the past several years have been in large part due to cost-cutting, cheap-financing, or share buybacks rather than because of more revenues. "We haven't seen sales growing," says Sanchez. "We're in a P/E expansion mode that is, at some point, going to have to be justified. So, I don't see us hitting 2,000. Not this year."

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Sanchez believes that with all other measures just about exhausted, companies can now only increase earnings by increasing top line revenues. However, she doesn't believe it will be so easy. She sees three reasons that will be the case: the high duration of unemployment (above 35 weeks), falling wage growth, and the lowest labor participation rate since the late 1970s. She sees that as an indication of a fundamental problem in the economy.

"We aren't passing those earnings that we're making through to wages," says Sanchez. "Unless we pass them through to wages, we aren't going to see it come back to us in sales."

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, thinks the charts disagree with Sanchez and 2,000 is more than a distinct possibility.

"We are going to get there," says Ross. "And, it could be far sooner rather than later. It could be something we see by the first half or by the end of the summer perhaps. That's based purely on the technicals alone. As we know, price and value in this market are like two ships passing in the night – tangentially related at best."

Ross says the charts show a price target of 2,100 in the S&P 500 within the year. After testing the technically significant 150-day moving average in late-January and early-February, the index broke above its previous resistance level to record highs.

"This market is in an extremely strong position across sectors [and] across indexes," says Ross, noting that indices such as the NASDAQ Composite and Russell 2000 are at or near multiyear if not record highs. 

"I like just about everything I see here," says Ross. "I'm not saying the market will never go down again, but I'm telling you this is a year you want to continue to buy stocks. And, yes, set your sights on that 2,000 level."

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