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FILE - In this Thursday, Aug. 21, 2014, file photo, trader Edward McCarthy, left, works on the floor of the New York Stock Exchange. As stocks continue to rise, investors are wondering if it's time to sell. (AP Photo/Richard Drew, File)

Soaring stocks, dueling forecasts

Bulls point to growing economy; bears to trouble abroad

NEW YORK – Is it time to cash out of stocks?

The market has nearly tripled in a little over five years, and the Standard & Poor's 500 index closed above 2,000 for the first time on Tuesday. With each record, the temptation grows to take your winnings and flee.

Plenty of experts think stocks are about to drop. But many others offer compelling arguments for the rally to continue for years.

The bulls point to a strengthening U.S. economy. They also like that companies have plenty of money to keep buying back their own stock.

The bears argue that stocks already reflect years of future profit gains. They also note that many economies around the world are stumbling and that U.S. interest rates could rise soon. Remember, though, that even the best investors find it nearly impossible to time the market to catch the lows and highs.

The bull and bear cases in detail:

Bull case

A stronger economy – Four of the past five bull markets have ended with investors selling in a recession, or bailing out because they anticipated one. The odds of a downturn anytime soon? Not very high, at least based on the latest economic reports and forecasts.

The U.S. economy is expected to grow 1.5 percent this year, then 3.4 percent in 2015, according to Congressional Budget Office estimates released Wednesday. One reason is companies are hiring at the fastest pace in eight years.

Low interest rates – Interest rates are low, and that's been great for stocks. They help lower borrowing costs for consumers and businesses. They also hold down interest payments on bonds, making stocks look more attractive by comparison.

Many investors expect the Federal Reserve to start raising short-term rates in the middle of next year. If the Fed keeps the hikes small, the stock market might shrug it off.

That's what happened in the last round of Fed hikes, in 2004. The S&P 500 gained 9 percent that year.

Buyback boom – One of the biggest forces in the stock rally so far is companies buying back their own shares. Companies in the S&P 500 have spent $1.9 trillion on buybacks since the bull market began in March 2009, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

By creating more demand for stocks, buybacks have kept prices rising even as others sell. Mutual funds, investment brokers, foreigners and pension funds have been net sellers of stocks over most of the last five years, according to the Fed.

Bear case

Stocks not cheap – It's fine to forecast big profit gains well into the future, but what if prices fully reflect expected gains?

That's what many bears think. They cite the price-earnings ratio, or the price of a stock divided by its earnings per share. If a share costs $100 and the company is expected to earn $5 per share in the coming year, the P/E ratio is 20.

The S&P 500 now trades at 15 times what companies are expected to earn over the next 12 months, according to FactSet. That is slightly above the 10-year average of 14.1.

The problem is, P/Es are often not reliable gauges of stock value. They are based on just one year's earnings, which can rise and fall along with the economy.

Coming rate hikes – The Fed may be able to raise rates slowly without damaging the economy and stock markets. But its record isn't entirely reassuring. Three of the past five bull markets ended after the Fed increased rates.

Struggles abroad – U.S. companies rely more than ever on foreign economies remaining healthy. Unfortunately, many of those economies are stumbling.

The 18 countries that share the euro didn't grow at all last quarter. China is slowing rapidly, and Japan shrank 7 percent last year.

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