The current bull market run has left even optimists scratching their heads, and that raises an uncomfortable question about where stocks can go from here.
The S&P 500 hit a record high last week, surpassing its previous peak in 2007 and fully recovering from the ensuing bear market that had cut the benchmark index in half by early 2009.
In the first quarter of 2013, the index rose 10 per cent, marking its seventh double-digit quarterly gain since the stock market began to recover four years ago.
But this latest run-up has surprised even analysts and strategists – ebullient types whose forecasts typically lead actual performance.
The S&P 500 has already blown past the average full-year return that Wall Street strategists expected at the start of the year.
Many of those market seers are now scrambling to catch up. Two weeks ago, the strategist at Goldman Sachs Group raised his target by 50 points. The strategist at Morgan Stanley raised his target by a remarkable 166 points, transitioning from a bear to a bull.
As Bloomberg News pointed out, analysts of individual equities have also been caught off guard.
Bloomberg compared the average forecasts among analysts with actual share prices for stocks within the S&P 500. The share prices are just 5 per cent below analysts' forecasts, which is the narrowest spread for data going back to 2006.
On average, analysts' forecasts have led share prices by 14 per cent, according to Bloomberg. Even more impressive, 134 stocks in the index – or nearly 27 per cent – are now in the unusual position of being priced above analysts' forecasts.
Bloomberg's numbers suggest this is very good news. Companies whose share prices have risen above analysts' forecasts since 2006 have risen another 9.6 per cent over the next 12 months.
What's more, the last time more than 100 companies traded above analysts' forecasts, the S&P 500 rose 24 per cent.
You could dismiss these observations as nothing more than quirks of the stock market's recovery.
Yet Bank of America strategists have made a similar point, arguing that Wall Street's view on stocks has a contrarian streak. That is, when analysts are bearish, stocks tend to perform well – and their sentiment today points to 12-month gains of 28 per cent.
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, added that the stock market is simply catching up to fundamentals.
"While the S&P 500 is essentially flat over the last five and 13 years, the underlying fundamentals have improved significantly," she said in a note.
Compared to the previous 2007 peak for the S&P 500, she argued, profitability has risen 13 per cent, debt ratios have fallen and dividend yields have increased.
However, the skeptics still have some room to roam. According to Bespoke Investment Group, there have been 13 first-quarter returns of 10 per cent or more, going back to 1928. On average, the rest of the year has produced returns of just 1.4 per cent – suggesting that after big gains, the market tends to move sideways.
Strategists at Pavilion Global Markets looked at the number of stocks within the S&P 500 that are trading within 10 per cent of their 52-week highs. The number is 81 per cent – which is exceptionally high and usually points to poor performance over the next three months.
Since 1991, whenever 75 per cent of stocks traded near their 52-week highs, the S&P 500 has fallen an average of 1.9 per cent within three months.
"Considering that U.S. equities are up 24 per cent over the past nine months, we would expect stocks to move sideways for the next few weeks before they get a second wind," the Pavilion strategists said.
That's not exactly bearish. But with the bull market confounding expectations this year, the case against stocks is getting harder to make.