At the start of the historically weakest month for equities, there are plenty of reasons to believe stocks may be just about reaching a top - at least in the short term.
The S&P 500 has surged 14 percent this year and is at its highest level in more than four years. Not counting 2009 when equities rebounded from crisis lows, this could be the best year for stocks since 2003 - nearly a decade.
A report showing hiring in the United States in August was much slower than expected and warnings last week of a slowdown at Intel and FedEx, that will likely foreshadow a very weak earnings season, have not been enough to deter investors buoyed by aggressive central bank action.
After the European Central Bank's pledge last week to buy the debt of troubled euro zone countries, the Fed is widely expected to introduce new stimulus measure in the form of more bond buying when it closes its two-day meeting on Thursday.
"Good news is good news and bad news is good news, largely because of the Bernanke put," said Eric Kuby, chief investment officer at North Star Investment Management in Chicago.
The S&P 500 is now trading at 13.3 times its forward earnings estimates, meaning investors are willing to pay just over $13 for one dollar of expected earnings from S&P 500 companies.
Although that is below a median forward price-to-earnings ratio of 13.7 since 1976 - according to Morgan Stanley - it is close to the upper end of the range in the low-growth, post- crisis era of the last five years. During that time there has been a median price-to-earnings ratio of 12.9, according to Thomson Reuters data.
In fact, the recent price-to-earnings high was 13.5 in February 2011, just above current levels. If you are of the view that little has changed since then, there is no reason for the ratio to go much higher. That combined with a slowing earnings picture inevitably means lower prices.
"Our view is that the next double-digit move in the market is down not up," Morgan Stanley said in a research note.
The analysts, led by equity strategist Adam Parker, believe the S&P 500 will finish the year at 1,214, 15 percent below where it is now.
At current levels the risk-reward skew is starting to look less attractive than it did. That is especially true given the uncertainty the November presidential elections are likely to generate, as well as the potential for more slip-ups in Europe.
"We put a 1,450 target on the S&P for year and so I'm encouraged," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "But I will say, if this trend continues, I'm inclined to declare victory and move to the sidelines (and) start taking profits."
The average analyst estimate for the S&P 500 this year is 1,383, according to a Reuters poll from the middle of the year. That shows Ablin is not alone. The S&P's performance has already outstripped most expectations.
Another negative factor is the rapidly declining earnings outlook for the remainder of the year, as well as for 2013. Analysts are now expecting a 2.1 percent drop in third-quarter earnings year on year. Just about a year ago they were looking for growth of nearly 15 percent.
FORECASTS TAKE A HIT
Last week, Jonathan Golub, UBS's chief U.S. equity strategist, cut his S&P 500 earnings outlook due to a weaker U.S. economic outlook, conversion distortions from a stronger dollar, as well as weaker oil prices.
For 2012, Golub cut his S&P earnings forecast to $102.50 from $103.50, and to $107.00 from $110 for next year.
Golub believes third-quarter earnings will be just $25.10, 2 percent below the same period last year. On an annualized basis that would translate into an S&P 500 level of just over 1,300 given a price-to-earnings ratio of 13.
There are signs that those forecasts are already starting to come true.
FedEx Corp, the world's second-largest package delivery company, last Tuesday cut its profit outlook for the current quarter, saying weakness in the global economy was hurting demand for overnight international shipments.
Three days later, Intel Corp cut its third-quarter revenue estimate due to a decline in demand for its chips, as customers reduce inventories and businesses buy fewer personal computers. A revision of Intel targets had been expected by some analysts after PC makers Hewlett Packard Co and Dell Inc warned of slow demand last month.
Golub is now talking about an earnings "drought" and even an earnings "recession."
"While investors are focused on monetary policy, we believe these weak earnings results will contain a market advance," he said in a research note.
Golub has a year-end S&P target level of 1,375, 4.3 percent below Friday's closing level.
The latest leg of the rally was a 2 percent surge on Thursday that pushed the S&P 500 to its highest level in more than four years and the Nasdaq to its highest in 12 years.
The move was courtesy of the European Central Bank and its pledge to act as an unlimited lender of last resort to troubled European nations. But it is not a done deal.
The German constitutional court will rule on Wednesday whether the European Union's new ESM rescue fund should come into being. If it unexpectedly vetoes it, the ECB's plans could be left in tatters since its intervention requires a country to seek help from the rescue fund first.
Dutch elections set for the same day appear to have been robbed of some of their potential drama, with the hard-left Socialists now slipping in the polls. Instead, the fiscally conservative Liberals are set to win most seats with the center-left Labour party also polling strongly.
But there are no guarantees and Germany could yet lose one of its staunchest pro-austerity allies in the debt crisis debate.
"While we got some monetary solutions we still need more answers (on) the underlying European economy," Ablin said. "I don't think bond buying solves the euro crisis."
Europe is not the only concern for investors. A slew of Chinese data on Sunday served as a reminder of the slowdown in the world's second-biggest economy.
China's factories ran at their slowest rate for 39 months in August. Retail sales rose in line with forecasts but the trend of spending so far in 2012 has been tracking slightly lower. A double-digit rise in fixed asset investment showed that infrastructure spending remained key to economic growth.
The Baltic Exchange's main sea freight index, which tracks rates for ships carrying dry commodities, fell for the eighth straight session on Friday. Some of the weakness is blamed on collapsing iron ore demand from China.
Shipments of iron ore account for about one-third of sea-borne volumes. Spot iron ore prices just hit their weakest in nearly three years, extending a market rout that began in July, while poor demand drove Shanghai steel futures to a record low last week.
But even with the less-than-stellar fundamental picture, the old saying "don't fight the Fed" has proven to be true once again.
The chances of the Federal Reserve embarking on another round of bond purchases in the coming week jumped after the disappointing August U.S. employment numbers on Friday, according to a Reuters poll of economists.
The median forecasts from 59 economists gave a 60 percent chance the Fed would announce another round of quantitative easing, or QE3, on Thursday.
For the last 40 years the MSCI world index has lost 0.9 percent on average in September, making it the worst performing month for the stock market, according to data from Thomson Reuters. So far the index, a broad measure of global equities, is up 2.6 percent this month.
This year may well buck the trend.
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