Here's What Has Been Driving The Stock Market Since 1960

The S&P 500 is already up 26% since the beginning of 2013, and almost all of those returns have been driven by an expansion in the multiple investors use to value the market as opposed to actual growth in companies' earnings.

"Year to date, 75% of the S&P return has come from its [price-to-earnings ratio] expanding to 16.5x from 13.7x trailing EPS at 2012 end," writes Deutsche Bank chief U.S. equity strategist David Bianco in a note to clients. "Excluding 2009, this is the largest [valuation multiple] contribution to market return since 1998. Before assuming further [multiple] expansion we think it is important that investors be confident in healthy EPS growth next year. Hence, we encourage frequent re-examination of the capex and loan outlook upon new data points."

The chart below decomposes S&P 500 total returns for each year since 1960 into the contributions from multiple expansion, earnings growth, and dividend yield.

"In our view, further S&P [multiple] expansion from 15x 2014E EPS today would be justified if long-term Treasury yields slowly rise as the Fed tapers, but plateau below historical norms (~4% 10yr, ~2% 10yr TIPS or less)," says Bianco. "The less the Fed's balance sheet expands in 2014 the less the risk that yields rise above historical norms when QE ends or when the Fed's balance sheet contracts."