3 reasons why this bull market is still for real

Published Wed, May 27 20158:56 AM EDTUpdated Wed, May 27 201511:25 AM EDT

Even though stocks appear to have hit a roadblock, many market watchers believe the rally has the potential to continue. One of the reasons is strong earnings growth, which is being masked by a profit crash in the energy patch, according to analysts. When excluding profits from energy firms, which have been affected by a steep drop in oil prices, 2015 EPS growth estimates for the S & P 500 jump to 10.8 percent from 3.6 percent, according to RBC Capital Markets. Source: RBC Capital Markets Similarly, Wall Street bears have claimed the bull run is nothing but smoke and mirrors fueled by corporate buybacks financed through debt. A review of the data shows that free cash flow is sufficient to fund more than 100 percent of dividends and buybacks, according to RBC's chief U.S. market strategist, Jonathan Golub. "Corporate leverage remains historically low and cash balances high," said Golub, who thinks this aspect could in fact lead to higher payouts in excess of earnings growth. "Companies have a huge opportunity to increase EPS further should they choose to tap into this capital cushion." Source: RBC Capital Markets (Note: S & P 500 ex-financials) And although valuations remain above their historical averages, these metrics, by themselves, offer limited insight for long-term investors. Here's what Bank of America wrote in a recent note to clients: "Valuation may be the most important factor in determining long-term returns, but for time horizons of less than three or four years, valuation explains very little about the variability of stock market returns ... so if valuation is your sole justification for a bullish or bearish stance in a given year, be prepared for a wide variety of outcomes." While the S & P hovers around an all-time high, the firm believes returns from other asset classes "don't look particularly compelling" compared with equities, which appear "well-positioned to offer the best returns of the bunch" in the long run. Read More No more closet indexing, time to get active

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Even though stocks appear to have hit a roadblock, many market watchers believe the rally has the potential to continue.

One of the reasons is strong earnings growth, which is being masked by a profit crash in the energy patch, according to analysts.