NEW YORK – The stock market is missing you.
For more than three years, ordinary investors disgusted with wild swings have pulled money out of stocks. Theyve missed a breathtaking bull market: The Dow Jones industrial average has almost doubled from its low point during the recession on March 9, 2009.
In the meantime, corporate America has racked up double-digit profit gains. If investors valued stocks at normal historical levels based on profits, we would be celebrating Dow 15,000, not Dow 13,000.
But the profit explosion is over, and the Wall Street pros who trade stocks mostly for big institutions and the rich are getting antsy. Theyve been doing the buying. And if Main Street doesnt join them, the historic rally could slow or even end.
Everyday investors are more aware of the risk of the market, says Howard Silverblatt, senior index analyst at Standard & Poors. Theyre nervous. Theyre scared.
The Dow closed above 13,000 last week for the first time since May 2008, four months before the financial crisis. In a sense, the milestone was disappointing: Profits are at an all-time high, yet the Dow is well below its record of 14,164, set in October 2007.
Even though profits are growing, individual investors arent buying. That shows up in something called the multiple – the ratio of what investors are willing to pay for a companys stock, compared with its annual profits.
If a stock trades for $100 and the company has made $5 in profit per share, its multiple is a fairly high 20. A higher multiple means more confidence that profits will grow.
These days the multiples dont show much confidence.
Investors are paying a multiple of 13.5 times the past years earnings for stocks. The typical multiple over the past 75 years is 16.
Weve built profits in the past three years, says Jim Paulsen, chief investment strategist at Wells Capital Management. Now we need to value them differently.
The chatter on Wall Street about multiples comes as stock analysts worry that the double-digit profit growth is largely over.
For the first three months this year, profits of companies in the widely followed S&P 500 index are expected to grow just 0.4 percent over the same period last year, according to FactSet, a provider of financial data.
For all of 2012, they are expected to climb 9 percent. That assumes they will pick up toward the end of the year.
The modest profit picture doesnt necessary doom the rally. There have been periods when earnings barely budged and stocks soared. In the five years through 1986, stocks in the S&P 500 nearly doubled while earnings slipped 2 percent.
The explanation is the magic of rising multiples. The average zoomed from nine times earnings to nearly 17 times. Could we be entering a similar period of growing confidence?
Paulsen thinks so. He says that investors have shaken off fears of another recession and that debt-ridden Europe appears on the mend. He expects investors will value stocks at 15 times earnings by the end of the year, pushing the Dow and S&P closer to their records.