Just how high can the ASX go? It’s a question on everybody’s mind after the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) hit a fresh 52-week high of 5,463 on Wednesday. Amazingly, not only is 5,463 a 12-month high but it is also a five-and-a-half-year high. The last time we were at these levels was in mid-2008 just as the market went into freefall and into the depths of the global financial crisis (GFC).
Assuming the market can break through the psychological barrier of 5,500 in the next few weeks then we would only require a 9% upwards move to hit 6,000. Given the market is currently only up 2% since January, it doesn’t seem far-fetched to suggest that we could be there by calendar year end.
There are of course plenty of reasons to be concerned about the stock market rallying higher with many stocks appearing to be trading on lofty multiples and the outlook for earnings growth and economic growth looking somewhat muted. However there are also plenty of reasons to be positive that the overall market can justify a higher level than five-and-a-half-years ago.
Consider some of the largest constituents of the index. For the year ending 30 June 2008 BHP Billiton Limited (ASX: BHP) reported earnings per share (EPS) of 285 cents per share (cps); for the current financial year (FY) ending 30 June 2014 analyst consensus forecasts have the global miner earning 261 cps. Across at Woodside Petroleum Limited (ASX: WPL), the oil and gas producer earned 305 cps in FY 2008; in FY 2014 it is forecast to earn 270 cps.
Meanwhile in the banking sector, National Australia Bank Ltd. (ASX: NAB) reported EPS of 261 cps in FY 2008; in FY 2014 analyst consensus expects NAB to earn 268 cps. Turning to a cross-section of the industrial companies amongst the largest constituents they too are forecast to report earnings which could arguably justify the market heading to 6,000. Origin Energy Limited (ASX: ORG) earned 58 cps in FY 2008; come FY 2014 EPS are forecast to increase to 68 cps. Likewise CSL Limited (ASX: CSL) was earning 127 cps in 2008, yet this year is forecast to earn 248 cps.
As the above comparisons highlights, while the resource exposed stocks are struggling to boost their earnings above the levels of five years ago, other financial and industrial companies have surpassed those levels. With the worst of the GFC behind us, even if the economic and earnings recovery continues to be lethargic, stocks could very well continue to shuffle higher. All this suggests the 6,000 level is certainly within reach.