What would you do if you earned a year's pay for six months' worth of work? Would you pocket the money and run? Or stick around hoping for another outsize check? That's the dilemma facing investors now. Since the start of the year, the Standard & Poor's 500 Index ($INX) has returned nearly 8%. That matches or beats most forecasts for all of 2012 and approaches the U.S. stock market's long-term record.

Here's the dilemma for prognosticators: Just when many (including us) determined that their targets for 2012 had been too conservative, a series of surprisingly tepid economic reports cast doubt on the strength of the recovery, one of the foundations for this year's rally. For the record, we believe a springtime hiccup in stock prices was a pause in a continuing upward, albeit moderate, climb. We now think that U.S. stock prices could return 12% to 15% this year, putting the Dow Jones industrial average ($INDU) in the neighborhood of 13,800 and the S&P 500 index at about 1,425.

Considering that the indexes were within shouting distance of our target in early May, our prediction could turn out to be overly cautious -- again. Or it could be that any gains at all from recent levels will be hard-won in a choppy market. You can make a case for either scenario.

For all the focus on picking a price target and forecasting a return, trying to gauge how much gas the market has left misses the main point. And that is that stocks, particularly in the U.S., still represent good value given the earnings potential and rock-solid finances of corporate America, the reasonable strength of the economy and the competition (or lack thereof) from fixed-income investments. (Treasury bonds, for example, are yielding less than 2% for 10-year debt, and savings accounts and money market funds are paying practically nothing.)

"Whether the market has gone up or down is less important than how it's priced," says Pat Dorsey, the president of Sanibel Captiva Investment Advisers. "We still think equities are reasonably cheap."

The case for stocks

Owning a piece of corporate America sure seems like a good deal. Analysts expect companies in the S&P 500 to log earnings growth of 6% this year and 10% in 2013. At 1,354, the S&P sells for about 12 times projected earnings for the coming 12 months, below the 10-year average of about 14%.

Indications are that as investors become more confident about the health of the economy and corporate finances, they are becoming more willing to pay a little more for stellar company profits. And as price-to-earnings ratios climb, stock prices will climb as well. The crucial question is how long companies can keep the earnings streak going. "Earnings sustainability is something we're paying attention to," says Greg Allison, a portfolio strategist at RegentAtlantic, an investment firm in Morristown, N.J.

Dividend growth is just as stunning. Analysts at Bank of America Merrill Lynch expect S&P firms to boost payouts by an average of 15% this year and 9% next year. "From a micro perspective, at the corporate level, things are still pretty darn good," says Sonders.

It's the macro perspective -- the big economic picture -- that gives investors intermittent fits. After the economy got off to a buoyant start this year, some reports revived fears that it was sinking. Kiplinger's expects gross domestic product to grow a modest 2.3% this year, but push closer to 3% next year -- not bad for an economy that a lot of people thought was headed into another recession at this time last year. So far in 2012, the economy has produced an average of 200,000 new jobs per month. Depending on how many job seekers re-enter the market, the unemployment rate could fall to about 8% this year, from an average of 8.9% in 2011.

The news isn't all good. Politicians are likely to push us to the edge of a fiscal cliff as the end of the year approaches. Unless lawmakers act before the start of 2013, the so-called Bush tax cuts will expire, including the preferential 15% rate on qualified dividends. The temporary payroll tax cut will vanish, along with some jobless benefits. And $1.2 trillion in spending cuts over the 10 ten years will be triggered if Congress can't reach a budget compromise. "We could be in a recession in 2013 if all of those things expire," says Lisa Shalett, the chief investment officer of Merrill Lynch Global Wealth Management. When push comes to shove -- and it will -- we expect a compromise.

Then there's continuing turmoil overseas. A eurozone recession and slowing growth in emerging markets are bad news for growth in U.S. exports, which could slow from 6.7% last year to 4.2% this year, according to IHS Global Insight. High gasoline prices are squeezing consumers, with tensions in Iran threatening to disrupt supplies. But consumers are in much better shape this year than last. The rate of consumer inflation rose from 1% at the start of last year to nearly 4% by last fall -- the equivalent of subtracting three percentage points from household income growth. This year, the trend has reversed, as food and other commodity prices have fallen and gas prices have slowly begun to moderate. The inflation rate should fall to about 2% by year-end.

Meanwhile, housing is bouncing along a bottom, and -- wonder of wonders -- banks are lending again. Bank lending, which was anemic during the first two years of the recovery, has risen steadily over the past year -- a telling sign, says James Paulsen, an economist and chief investment strategist at Wells Capital Management, in Minneapolis. "The biggest thing that's starting to happen is a slow but steady resurrection of confidence in this country," says the bullish Paulsen.

Stocks and funds mentioned on the next page include Caterpillar (CAT), Parker Hannifin (PH) and Industrial Select Sector SPDR (XLI).

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