Profit growth and dividends give stocks the potential to rise 6 to 7 percent this year, says John Bogle, founder of The Vanguard Group.
Actual stock prices depend on investor attitudes, so the market is difficult to predict, he tells
CNBC. "I look at the basic value from corporate America," he said.
The market has a 2 percent dividend yield, and profits should increase 4 to 5 percent a year, Bogle explains. "That's a 6 or 7 percent internal rate of return. It all depends on what kind of valuation we get. I'd say the valuations are a little high, but not extremely high."
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In the long run, stock market value is created by corporate performance, which means strangely enough that "stocks are derivatives," he argues.
"They're derivatives of the value created by our corporations. We want to make sure we understand that the derivatives sometimes get out of line with the fundamentals."
Bogle is concerned about corporations engaging in accounting shenanigans. "Corporations do some things that are pretty bad. They're kind of in a league with their own public accountants."
As a result, earnings don't carry the same meaning as in the past.
"In particular, if you look back at last year's reported earnings, after all the write-offs, the P/E [price-earnings ratio] is about 20 times," he maintains.
"If you look ahead, which is what Wall Street does on this year's operating earnings, not the reported earnings, but the operating earnings, without all those bad things in them, the P/E goes down to 15. That's why I think the P/E is somewhat on the high side."
The trailing P/E ratio for the Standard & Poor's 500 Index is 18.2, according to
The Wall Street Journal.
As for last year, when the S&P 500 generated a juicy total return of 32.4 percent, Bogle attributes the strong performance partly to rising dividends.
"Ever since the great dividend disaster of 2007, 2009 when the financial stocks pretty much eliminated dividends, we've had several dividend increases year after year," he notes.
"We don't pay nearly enough attention to dividends, which are so fundamental to the investment equation as I look at it. The continued dividend growth meant the that the market could go up about what it did and still not get dividends out of the range of 2 percent."
That's a paltry yield compared to the historic trend of about 4.5 percent, "but still double what it was in the lunatic days of 2000," Bogle adds.
Others have an optimistic view of U.S. stocks too, despite the S&P 500's 3.3 percent decline so far this year.
"I know a heck of a lot of people who still want to get money into the market and feel they missed out last year. They are looking for an entry point," Bill Stone, chief investment strategist at PNC Wealth Management, tells
The Wall Street Journal.
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