As we have painstakingly pointed out, rising equity markets in 2012 have mostly been a function of rising multiples applied to relatively stagnant earnings.
While JPMorgan's CIO Michael Cembalest would have given odds no better than 1 in 4 of a 17% advance in the S&P this year, he does note that forecasting annual equity returns is an entirely treacherous (and we add foolish) exercise as real return variation has completely swamped industry expectations for the last 60 years.
The traditional Graham-Dodd/Shiller valuation model makes equities look expensive currently, but Cembalest notes, valuations might not be the driving factor at this point.
The debasement of money by the Fed has altered the calculus of investing for many participants, and not necessarily for the better (as he notes ongoing work that hints at since the Greenspan/Bernanke era of negative real interest rates began, stock market volatility is even higher than before the creation of the Fed in 1913).
Of course, by driving interest rates down and promising to keep them there, a 7% nominal equity earnings yield (i.e., a 14 P/E) is transformed into a more compelling investment - but critically (especially for social and political reasons) the 'value' of this adjusted earnings yield is questionable given the earnings boom is derived from extraordinarily weak labor compensation and potentially unsustainable demand from Europe/China.
The growth of corporate profits has delinked from nominal GDP growth, a departure from past cycles.
This is unfamiliar territory for investors, since it suggests that you should just ignore weak domestic growth concerns and watch profits keep rising. The political and social risks of this trend are self-evident.