With the blue chip indices at or near all-time highs and the year-to-date gain for the S&P 500 pushing 27 percent in 2013, it appears that many analysts are beginning to develop a severe case of acrophobia. Everywhere one turns, questions about the sustainability of the bull market that is now either two-plus or nearly five years old abound. As such, 2014 may become the "show me" market.

It's Been All About the Fed

Throughout most of 2013, the bears have complained that the joyride to the upside has been all about the central banks of the world. The thinking has been that with the U.S. Federal Reserve and the Bank of Japan jointly pumping nearly $2 trillion a year into the system, much of that freshly minted cash has wound up in the U.S. stock market.

The glass-is-half-empty crowd contends that without the global QE programs, the world's stock market indices wouldn't be anywhere near where they currently reside. But with the various "carry trades" and fancy strategies utilized by the big banks, institutions and hedge funds that can actually borrow at zero percent, the bears contend that free market "gravity" has been suspended.

And while the bear camp has had a rough go of it this year, they continue to believe that economic and market gravity will return at some point soon - and stock prices will be none the better for it.

It's Been All About Multiple Expansion

Another argument that has been bandied about quite a bit lately is that the robust gains seen in the U.S. stock market are largely due to "multiple expansion." In English, this means that investors are simply willing to pay more for a dollar of corporate earnings than they have in the past. And because of this expansion of Price-to-Earnings multiples, stock market valuations have become expensive.

The counter argument here is that GAAP EPS (earnings per share using generally accepted accounting principles) improved on the order of 12.5 percent this year and are projected (always a dangerous game) to grow another 11 percent next year. Therefore, one must admit that there has been at least a modest amount of organic growth mixed in with the expansion of the multiples.

But, But, But...

Because stock prices have grown faster than earnings over the past two years, valuations have moved toward the expensive zone. And while the stock market can remain "overvalued" longer than most investors imagine possible in real-time, the current trend of "multiple expansion" clearly can't continue unabated forever.

However, two of the biggest problems with playing the valuation game include the facts that (a) stock market valuation lies in the eye of the beholder and (b) there are a great many valuation indicators. Thus, unless valuations become blatantly lopsided such as they were in 2000, making short- to intermediate-term investment decisions based on valuations can be problematic.

The Bigger Problem

The bigger problem for stock market investors lies in the growth rates of the U.S. economy and corporate revenues.

Everybody on the planet knows that the economy is not exactly hitting on all cylinders at the present time. There are lots of reasons why this has been the weakest expansion in modern times. But the bottom line is GDP growth has been anemic. It makes sense then to argue that if economic growth doesn't pick up, the stellar gains in the stock market won't last.

Next up is the issue of corporate revenues. To be sure, corporate profits are at an all-time high. However, the knock on this statistic is that corporate America has largely used cost-cutting measures in order to squeeze out more profits from the current revenue stream. And since revenue growth has been underwhelming during this economic cycle, the bottom line is that revenues are going to need to grow at a faster clip if stock prices are to continue to rise.

Show Me, Or Else!

Taking stock of the current situation in the stock market, one can argue that the current bull is getting old, that valuations are becoming stretched, and that sentiment is entirely too positive. In short, such a combination has usually led to meaningful declines in the stock market.

But before you run out and start loading up on those inverse ETFs, it is important to understand that the wild card here is growth. If economic growth does perk up toward more normal levels, it would follow that revenues - and, in turn, earnings - would also improve. And if revenue growth begins to show up, it is a safe bet that stock prices will continue to rise.

So, unless another crisis emerges or the Fed decides to start tightening rates much sooner than anticipated (a highly unlikely event), the big key to the coming year will be state of growth in the economy, revenues, and corporate profits. Improved growth will be a good thing for investors while disappointment will likely be treated badly - to the tune of a 15 to 20 percent decline in stock prices.

In essence then, investors will be saying "show me the money, or else!"

Turning to this morning... Manufacturing data is in focus around the globe this morning. By 10:00 am eastern time traders will have received the PMI numbers for China, Europe, and the U.S. So far at least, the data has been largely positive as China's data held steady at strong levels and there were some upside surprises in the Eurozone, Germany, and Italy.

Positions in stocks mentioned: none

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editor and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.