The US stock market had a stellar year in 2013. However, some commentators are now concerned that the market has had its run and is now a sell.

I disagree wholeheartedly with that view: from where I stand, the future looks very bright for the US market.

Valuations

Investors’ biggest issue usually revolves around valuation, so let us start there. With the forward P/E ratio on the S&P 500 at around the 16x level, I would say it is neither cheap nor expensive; indeed, it sits around the ten-year average.

The chief concern I hear is that the P/E has expanded without the earnings growth to back it up – and this is a fair point: the market has gone up due to P/E expansion, rather than earnings.

However, let us not forget, markets are forward looking and they discount events before they happen. A period of P/E expansion is exactly what one should expect before the GDP and earnings recovery happens.

P/E expansion is nothing more than a vote of confidence that markets and companies will be doing better in a year’s time than they are today. I believe this P/E expansion is entirely warranted because the future does look brighter. Why? Let us first look at the set-up of the market, then we will examine the economy.

All-time highs

The S&P 500 is at all-time highs – higher than the bubble year peaks in 2000 and 2007. Should this be cause for concern? Absolutely not. When you look back at what drove the market in 2000, it was tech, the dotcom boom, a one sector market. In 2007, it was a boom in commodities and credit. Neither of these trends were sustainable.

The market today, however, looks completely different. The sector leadership is broad, with healthcare, consumer discretionary, financials, industrials and staples all performing well. Materials and energy, excluding the commodity stocks within them, are also doing reasonably well, with only the bond proxy sectors, like utilities and telcos, underperforming. That is a very bullish set up.

This advance has also taken place in the absence of any debt. Leverage levels at both the corporate level and the individual level are at all-time lows. The market is going significantly higher in the absence of a credit cycle and, when that credit cycle begins, as it surely will, it will be a significant boost.

Low inflation

What of the economy, then? Again, to my mind, it looks in good fettle. The primary reason for this is the low inflation environment that prevails in the US. Inflation is set to stay low, in my view, for two key reasons.

The first is wage costs, the largest expense for corporates. This has stayed muted due to the unemployment level remaining quite high, meaning workers have had no bargaining power when it comes to wages.

The second is commodity costs, which have been falling consistently across the whole spectrum, be it corn, oil, copper or soya beans. One of my favourite measures to test the validity of my call on the market is gold, which usually performs well in times of inflation or concern over the financial markets. The price of gold has been a disaster since peaking back in 2011.

The macro environment, in general, is the best it has been for seven years. The European sovereign debt crisis is over, quantitative easing is in run-off mode (a big positive) and, for the first time in approximately 30 years, the big developed markets – US, Europe, UK and Japan – are all going up at the same time.

That is a powerful combination. And yet there is more to come. As mentioned, the rally has occurred without a credit cycle or a pick-up in employment, which is unusual.

But it has also taken place without any revival in capex or, until very recently M&A. I believe the capex and M&A resurgence will happen as the economy improves and confidence returns: indeed, $65bn of acquisitions have been announced in January alone.

Phenomenon

There is something special about the M&A occurring now: the acquiring companies’ share prices are leaping on the news. Why is this? Because the acquisitions are accretive on day one.

This is because American companies are so lean and efficient that when more product is added to the salesforce or production line, they are additive to earnings immediately. This phenomenon circles back to valuation: if the market is so overpriced, how can companies be making such accretive acquisitions? M&A is greatly helped by low interest rates, which the Fed has indicated will remain low for the foreseeable future.

The backdrop looks great and, for UK investors likely to benefit also from a strong dollar, I believe 2013 was the start of a big move, not the end of one.

S&P 500 is at all-time highs