Carl Icahn wants Apple Inc. (NASDAQ:AAPL) to repurchase $100 billion shares, as soon as possible.  Carl Icahn published a letter on his tumblr stating his desire for Apple Inc. (NASDAQ:AAPL) to increase its share buy back program.  Apple Inc. (NASDAQ:AAPL) is in no rush to make any changes to their current buyback plan.  The billion dollar company has most of its funds tied up in overseas accounts, which makes it difficult to bring the cash back.  Doing so can possibly incur a tax by the US government.  Some believe Tim Cook should forget about the stock price valuation, and instead should focus on putting funds into Research and Development, to build better and revolutionary products.

Below is a chart which depicts Apple’s current shares buy back program and plan:

(Source: Shareholder.com)

Icahn wishes Apple Inc. (NASDAQ:AAPL) to speed up its stock repurchase activities.  The tech giant has stated:

“We always appreciate hearing from our shareholders.  Since 2013, we’ve been aggressively executing the largest capital return program in corporate history.  As we’ve said before, we will review the program annually and take into account the input from all our shareholders.”

Thanks to Icahn, who was Apple Inc. (NASDAQ:AAPL)’s largest shareholder.  He recommended the share buy back program of which Apple took action.  Here’s a chart which depicts how aggressive Apple has been in their share buy back program.

Without a proper share buy back program, investors will complain about the low EPS growth.  Apple is resorting to smart financial engineering to prop up their stocks, as they search for new innovation.  The outcome would be worse if Apple Inc. (NASDAQ:AAPL) announced a year-over-year decline in EPS.  Therefore, buying back shares is the best strategy for them as they are able to show positive EPS growth.

What happens when a company doesn’t do a share buy back?

Take a look at Intel (NASDAQ: INTC).  The chip company stalled its share buyback program in 2013, reducing its buyback by 50%.  As a result, their earnings took a hit and they failed to meet analyst earning expectations three out of the four reported quarters.  These misses could be avoided if Intel had just bought back the same amount of shares.  Instead they were allocating their capital into Research and Development.  Strictly from an investor perspective, immediate buy back would make the company look better, and additional institutional investors would help bolster the shares.  Intel (NASDAQ:INCT) can be cited by some, to be doing a responsible thing by investing their funds into Research and Development.  The stock suffered at least 10% due to failure of continuing with a shares re-purchasing strategy.

Apple has been successfully investing into research and development, with $4.8 billion allocated for 2013.  This amount was 83% greater than their prior spending in 2011.  Even management confirmed they are continually spending more into R&D:

“Katy Huberty (Morgan Stanley): And Peter, you’re guiding OpEx flattish sequentially, despite the big revenue downtick. Are there any one-time items in SG&A and R&D in the March quarter? Or is the run rate reflective of investments for future opportunities?

Peter Oppenheimer (Apple CFO): It’s definitely the latter, and let me have Luca take you through some details.

Luca Maestri (Apple VP and Corporate Controller: Yes, at the midpoint of the range of our guidance, we are expecting a minor decrease of $50 million. This is largely due to the lower variable expenses that we’re going to have, in line with the seasonal sequential decline in revenue. But one thing that Peter already mentioned in his remarks is that we continue to invest very heavily in R&D. We make investments in areas that are visible to all of you today, but also in areas that are not visible, which we’re very excited about. And for the things that are not visible to you, obviously were impacting ahead of the revenue that these products and services will generate in the future. So there is nothing that is one-off in nature in our guidance.”

Some feel that Apple already spent enough into R&D, and spending additional funds would not increase the chance of success for their products.  More expenditure on R&D would result in lower net income and EPS.  There is no guarantee of future products and their potential success.

This radical range in valuation and the opacity between good and bad companies has brought an identity crisis in the S&P 500 (INDEXSP:.INX), which has made the investors to buy stock randomly. This convergence between high end technology companies and small scale utility companies further leading to total anarchy in the market.

Gaps between stocks narrowed down when investors started to shift from high valued technology companies to defensive small scale industries such as utilities and consumer staples. This made the good and bad companies indistinguishable.

Valuations of companies which are defensive, and are traditional safe havens are suddenly now converging with high end companies whose profit growth is twice.

Price ratio earnings among the 50 largest companies in the S &P 500 have come down to the lowest since 1990, with the deviation of about 22 percent.

Valuations were at its peak when the internet bubble rose to the surface and technology shares soared high. The deviation from the mean was 57 percent in 1999. The S&P 500 (INDEXSP:.INX) peaked the next year and fell 49 percent through October 2002.

The rapid growth of ETFs, which invest in a barrel of shares, makes it easy to gather large positions without regard to the individual companies. The ETF industry has boomed in recent years, with assets tied to American equities reaching $1.1 trillion

Cash churning in and out of the funds will narrow valuations in the stock market over time as investors choose to transact in a plethora of shares, rather than get into intricate details such as company earnings.

Only a few months ago technology ETFs soaked $970 million and investors pulled cash out of safe-haven groups. That trend reversed in the following months, with cash coming out of technology companies and into utilities and consumer staples.

Kayne Anderson Rudnick Investment Management’s Chief invested officer said that there are a number  of companies and industries doing pretty good, so the market doesn’t feel the desire to price one group much higher than everything else.  He further claimed that it’s a much better balance.

The forecast made by Morgan Stanley (NYSE:MS) commended the S&P 500 (INDEXSP:.INX). The forecast claimed that a steady though sustained period of growth could help the equity benchmark peak near 3,000 by 2020 amid continued economic strength in the U.S.

United States’ second largest drug maker, Merck, trades at 17.2 times profit and analysts foresee a change in the profit by 2014.

Apple Inc (NASDAQ:AAPL) rabid growth isn’t being rewarded equally either. The mammoth tech gadget maker company has a price-earnings ratio of 16.6, compared with 20.8 for PepsiCo, Inc (NYSE:PEP).  Analysts predict Apple will boost income by 14 percent this year.

This radical range in valuation and the opacity between good and bad companies has brought an identity crisis in the S&P 500 (INDEXSP:.INX), which has made the investors to buy stock randomly. This convergence between high end technology companies and small scale utility companies further leading to total anarchy in the market.

The strategists of Morgan Stanley speculate that the situation is optimum for the bull market to proceed on for years.

According to them it’s quite possible that S&P 500 (INDEX:.INX) surge up to near 3000, however the U.S Expansion would have to give certain guarantees whether it has at least half a decade left to it

It’s not just the strategists of Morgan Stanley (NYSE:MS), a lot of Wall Street analysts think that the contemporary events of market calamity to heal is not like the bubbles of the past.

An extended duration of deleverages along with an disparate worldwide recovery, are some grounds this could prove to be the largest US expansion.

In a detailed and quite expansive research paper, Morgan Stanley (NYSE:MS) strategists debate that the country’s providence is its initial parts of proliferation. It’s exquisitely placed in the world, profiting from better sheets, and low corporate spirits.

Here’s the bulleted summary:

• There is no coherence in global economy. Large geological economies vary, being at different places at the growth cycle. EM is suffering from a lag while the DM soars high.
• Volatility in the U.S. continues to dwindle, which can extend the lifespan of expansions.
• Deleverage in the country is continuous, although almost absolute and priorities for the sheets have changed
• Return money on debts are mellow and household debt balance tells us that about a vast cushion protecting consumers in a surging interest rate environment.
• No extension of inventories and Capital spending.
• Corporate management pomposity and other rationales of overheating remain numb.
• Many broad economic measures in the U.S. have just arrived at “normal” growth markers and are beyond sustainability.

Few points need emphasis from the analysts’ research

The Return Of Capital Spending

Foremost is the speculation on capital outlays, or business funding. The capex recovery turned out to be the most anxiously expected angles of this recovery. Current data depict that it will happen soon.

However, the notes suggest that capex levels are still at far better levels when compared to sales.

The Debt Cushion

The financial crisis isn’t a thing of the past, made prominent by a freeze in credit. That has made companies with strong providence limping to reach their financial commitment.

The crisis also enabled the companies to stretch their balance sheets, earning loads of money. A large number of big and small companies turned towards excessive amounts of refinancing, which further plunged their debt back by a few years. In the context of income statement, coverage ratio of large interests depicts that companies have plenty of operating gains to fuel more money into their recent debt needs.

Risk

There is no hardcore guarantee that about half a decade of uninterrupted sailing.

The head of U.S. strategist at Deutsche Bank (NYSE:DB) David Bianco is of the view that geopolitical stability in the area could make S&P 500 (^GSPC) reach 2,000 points approximately. With the succession of bond yields, the trading rates of stocks are elevated. The trading range of 10-year is 2.38 percent, still below its normal trading rates. The viewpoints of some financial analysts predict the incessant instability in the market. According to them, despite the probability of mounting stocks by the end of summer, there is going to be a huge pressure on sellers in the fall. Janet Yellen, the chief of Central Bank restated that the interest rates are not expected to raise any time soon because of the disintegration in the labor force.

Stocks are expected to face precariousness during midterm elections. The focal point of big investors would be tax and similar subject matters. Moreover, the month of September is also considered the nastiest time for stock market flow. The strategists of Morgan Stanley (NYSE:MS) notified that even the off-putting earnings are reconsidered during this time. Scott Wren, the senior equity strategist at Wells Fargo Advisors (NYSE:WFC) also said that there is going to be more fluctuation in September and it is a weak period for investors.

Bianco is of the view that Low bond yields could be a source of upheaval as well as support. The interest rates will not increase and are estimated to remain below because of constant turn down of treasury yields. He further forecasted a long absence of 4 percent norm in the market.

The geopolitical volatility and economic commotion caused not only U.S Treasury yields but lowered European yields as well. Last week, an immense drop in the 10-year bund yield was observed. It cut down to 1 percent for the first time ever in history. Additionally, the flat retail during the month of July also affected the growth in the U.S.

On the other hand, earnings are expected to increase and grow around 10 percent in the view of Bianco. The second quarter saw the income jump up by 9 percent, which proved to be a bright mark for stocks. The key factor for the right kind of P/E is thus said to be long-standing interest rates. The growth rate is always slower in long-term investments but it does turn out higher in the long run.

According to Wren, the strong second quarter earnings proved a positive factor and the stock market is flowing good. The ratio of 2014 earnings is 16.7 which is at the 30 year median. Bill Stone however seems worried about lower yields and considers the weak global economy the reason for this disorder. He considers it a negative sign for stock market and its future.

It has recently been reported that there is a huge possibility of S&P 500 reaching 2500 in the coming 2 years. This speculation has been put forward by the Federated Investors Inc (NYSE:FII) based on assessment of several market factors and conditions.

A number of reasons can be attributed to this speculated increase in S&P 500 over the coming 2 years. One of the major reasons is the strength of the US economy at present. According to recent statistics, the economy is growing at a rate of approximately 4 percent per annum. If this rate of growth continues, then the S&P 500 will easily be able to achieve the target of 2500, which will be nearly 30 percent higher than its present value of 1955 points.

According to experts, growth rates, bond rates and speculations about risk levels are three essential factors that determine market valuations and since, all three of these factors are moving in a favorable condition to increase the price/earnings multiple, we can be hopeful to reach the target by the end of 2 years. Moreover, earnings are continuously increasing which is another major ingredient for market valuation.

The US labor market along with the private sector is also witnessing improvements over the past two years and it is expected that both will maintain a growth rate of 3 percent or above over the coming two years as well. However, the energy sector needs to make a comeback by taking advantage of the lower costs.

According to the speculation of the Federated Investors Inc (NYSE:FII), it is expected that the S&P 500 would reach at least 2100 points by the end of this year, showing an increase of 7.4 percent from its benchmark value on Friday. Considering the favorable market conditions, $120 in earnings can easily be achieved. Moreover, the market multiple is expected to increase 17.5 times primarily because of the stable level of inflation as well as long term bond yields.

In case of bond yields, Federated Investors Inc (NYSE:FII) anticipates that the benchmark U.S. 10-year Treasury note yield will reach 4.5 percent in the coming 5 years. Currently, it stands at 2.3 percent. However, a drop is also expected in 10 year yields to 2.2 percent in the near term. According to an estimate, equities are being traded at 50 percent discount to bonds.

There are a number of factors which are causing the bong yields to remain low. One of them is the mistake behind the second Great Depression in 1937- the sudden tightening of the rates. Thus, the Fed is being extremely cautious this time to prevent another such instance. Moreover, the limited labor force and the lack of energy in those who are working are causing hindrances in the recovery process.

Thus, even though almost all market conditions are in favor of helping S&P 500 reach its target of 500 in 2 years, these few problems need to be taken care of.

Since there are minimum price pressures on the Federal Reserve, it gives them the option to restrict their monthly purchases of bonds. As a result, inflation has become less of an issue these days and businesses are at an advantage with decreasing commodity prices. Moreover, manufacturing is also growing at a slower speed as compared to before.

Shares Climb

The contract on the Standard & Poor’s 500 Index, which matures in the coming September, rose to 1958, showing an increase of 0.3 percent. A survey conducted by 70 economists has been used to make all these estimates. Except for the prices of food and energy, wholesale prices were expected to rise by 0.2 percent. This year, the report that includes wholesale prices, has been modified and now includes almost 75 percent of the goods and services of US. Previously, this report only included about 25 percent of the total goods. The report shows that prices for goods remained the same last month while costs of services increased by 0.1 percent.

Fuel Costs

The costs of energy showed a fall by 0.6 percent in comparison to last month. Gas prices have been decreasing since the past two months. However, this decrease in fuel prices was offset by a 0.4 percent rise in wholesale food prices last month.

It has been reported that companies like Keurig Green Mountain Inc. (GMCR:US) plan to pass on the burden of higher prices to the consumers. For example, manufacturers of beverages plan to raise prices by 9 percent effective from early November. Higher packaging, transportation and energy costs are the major reasons for this planned increase in prices.

Charging More

Several companies have already implemented this price increase to remain in competition. The prices of finished goods that are determined by the producers showed an increase of 0.2 percent in the month of July. This PPI or Producer Price Index can be used to formulate any changes necessary in the CPI or Consumer Price Index.

According to experts, there is now lesser possibility of inflation remaining below 2 percent as price increases are reaching closer to the goal. Moreover, the labor market is also witnessing a number of improvements, which will put additional pressure to keep interest rates low.

The price index reflecting the personal consumption expenditures rose by 1.6 percent in June as compared to the same month last year. The PPI is one of the major indicators of inflation used by the Labor Department. At present, the CPI has increased by 0.1 percent as compared to last month. The costs of imported goods, on the other hand, have decreased by 0.2 percent in July.