It is the best start to a year for US stocks in more than a decade. But after notching up a double-digit return, investors are asking whether the bull run on Wall Street will last.

The S&P 500’s 12 per cent gain in the first quarter means it is enjoying its best year-to-date since 1998. It set a closing high of 1,416.51 this month, a level last seen in May 2008.

The rally, while faltering this week, has been based largely on a stunning rebound in banks – with Bank of America up more than 70 per cent – homebuilders, and technology stocks, led by Apple, the world’s most valuable company and responsible for 14 per cent of the rise in the S&P alone.

The big winners of 2011 – defensive sectors such as utilities, consumer staples and telecoms with high dividend-paying companies – have lagged behind as riskier stocks have made the running.

The question is whether this is as good as it gets for equities in 2012. Much will hang on the US economy and whether solid jobs growth can continue to offset the confidence-sapping effects of falling house prices and debt deleveraging.

There is no shortage of threats to the US recovery: high petrol prices, weaker growth – even recession – in the eurozone and the possibility of a hard landing in China. A mild winter could act as a drag on US growth in the coming months if it turned out that demand was pulled forward.

Any disappointment on growth would probably persuade the Fed to embark on another round of quantitative easing a move that has buoyed stocks before.

But some worry that QE3 might not prove as stimulating for stocks next time round.

Indeed, more QE could lead investors to believe that the US is mired in a sub-par recovery that runs the risk of turning into a stagnation reminiscent of Japan’s experience in the 1990s.

First-quarter earnings figures due next month are an immediate hurdle, with analysts expecting no headline growth in profits for the first time since the third quarter of 2009.

“The market has been rallying on seasonal employment trends, and frankly mediocre economic data, which could show up more clearly in S&P 500 earnings,” says James Dailey, a portfolio manager at Team Financial Managers, who is positioned for a 20 per cent decline in the S&P.

“Earnings could be the issue that forces investors to reassess their optimism.”

Jason Subotky, co-manager of the $7bn Yacktman Fund, the best performing large-cap value fund for the past decade, says “profit margins are unsustainably high”.

It is worth remembering that the bull run owes more than a little to the strength of one stock: Apple.

“There are now four asset classes: stocks, bonds, commodities and Apple,” an analyst recently quipped, in a quote relayed across Twitter.

Since the start of the year Apple has contributed 20 points of the S&P 500’s 136-point gain, or 13.9 per cent, says Barclays Capital.

The last time a single stock was so influential in a rally was in 1999, when Microsoft contributed 14 per cent of a 10 percentage point move in the S&P 500.

A concern is that the ubiquity of Apple in investment products could amplify the effect of any price falls. Apple shares make up 3 per cent
of the portfolios of the 200 largest hedge funds, according to FactSet, almost three times as much as any other single stock.

According to Bloomberg data, Apple shares are also held by small-cap funds, international funds and dividend income funds.

Quincy Krosby, a market strategist at Prudential Financial, says: “There are many people invested in funds who do not even know they own Apple shares. If Apple suffers a correction, we don’t know how that will impact on investor sentiment.”

Others have faith in the bull run continuing into the second quarter. Jim Paulsen, chief investment strategist at Wells Capital Management, says: “The market still has a long way to go before it recognises the record-breaking earnings from last year, so it’s far too early to talk of an earnings-based market correction.”

Bob Doll, chief equity strategist for fundamental equities at BlackRock, says: “In our view, stocks still remain attractively valued and the market is still discounting a more negative environment than we expect.

“Corporations remain flush with cash and are poised to engage in a number of shareholder-friendly activities.

“From an individual investor perspective, a large number of people are still underweight stocks, and we have yet to see significant moves into equity mutual funds. As such, we believe we have not yet seen the end of the market’s upward moves.”

The market’s run extends from last October, with the S&P up more than 27 per cent since its low of that month. Some kind of correction may be overdue. Deutsche Bank says drawdowns of 3-5 per cent happen every two to three months on average for the S&P 500.

But that need not be bad news.

“The historical experience after a big, post-correction rally is that equities rise significantly further over the next year,” it says.

Additional reporting by Dan McCrum and Arash Massoudi

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