Confidence portends bigger gains on Wall Street

Confidence is swelling in America. Investors usually get worried when risks are ignored. But this time, they’re betting higher hopes about the future could be profitable.

Confidence levels are rising among investors, judging by the market’s more than 5% rally since the election. But consumers and businesses are also showing signs of optimism, according to an analysis by James Paulsen, economist at Wells Fargo Asset Management. Confidence in these three key players in the economy have surged to the highest levels during the current recovery and some to the highest in 30 years.

It’s not just about politics, there are economic facts to explain higher confidence. Inflation-adjusted economic growth rose 3.5% in the third quarter and could rise another 2.8% in the fourth quarter, Paulsen says. That’s a big relief for investors who endured real growth of less than 2% the past two years.

Some of the gains are finding their way to middle America, Paulsen says, citing the current “semblance of full employment.”

Corporate profit growth is also expected to grow for the second quarter in a row. Greater confidence comes at a price. The price-to-earnings ratio on the Standard & Poor’s 500 index has risen to 20.9 times, based on adjusted earnings the past 12 months. That’s markedly higher than the 18.8 average since 1988, according to data from S&P Dow Jones Indices.

Paulsen says greater confidence could build the foundation for more gains.