With the S&P500 up almost nine percent YTD, we are skeptical on how much higher it can push in the next three to six months. In late 2011, the S&P 500 was trading at a P/E multiple of less than 13, despite a slew of positive economic data and a quiet period of economic news. Investors realized that the index was trading at a discount, which sparked a rally that has brought the index up by 24% since its October lows. In the past three months, we have seen thinned trading volume and volatility at eerily low levels. So, what’s next?

For the most part, U.S. economic data has been extremely positive in 2012. We have seen the unemployment picture become much brighter and a heavy rebound in manufacturing. The Bryant Analysts expect manufacturing to continue to rebound given the competitive advantages of lowered-wage costs, a productive work force, and a favorable exchange rate. Gains in areas such as consumer spending, retail sales, and new home sales remain modest. With domestic economic conditions expected to stay moderately positive, let’s turn our attention to the international landscape.

Headlines in the coming months are going to revolve heavily around the price of oil. The price of Brent Crude is now over $125 per barrel and will likely continue to rise on uncertainties in the Middle East. Western countries continue to impose sanctions on Iran in hopes that Iran will cooperate with nuclear inspections; however, the sanctions have had the opposite effect and simply angered Iran. Iran has threatened to close off the Strait of Hormuz, through which a fifth of the world’s oil passes. Iran has also publicly stated that it will continue to pursue its nuclear capabilities, which has prompted the threat of an Israeli strike on Iran’s nuclear facilities that would likely start a war between the U.S., Israel, and Iran. The price of oil naturally fluctuates due to supply and demand factors – a spike in the price of oil caused by geo-political tensions such as those in Iran have an extremely negative impact on the economy. Over the next six months, rising oil prices will hit consumers in every area and will ease economic growth.

In addition to tensions in the Middle East, European sovereign debt crises remain largely unresolved. Financial markets remained much calmer throughout the second round of Greek debt negotiations, but the results of those negotiations have failed to appease investors. Over the next six months, the Greek debt crisis will be characterized by the success of negotiations with Greece’s private creditors and the effects of April’s federal elections on agreed-upon austerity measures (investor sentiment is negative about both). Overall, expect the next several months to be characterized by modest U.S. economic growth, elevated oil prices that will hit consumers, and uncertainty over the European sovereign debt crisis.

By: Nicholai Hill

Edited by:  Joe Cunningham & Chris Bekel