In DragonLZ's post, TSIF most accurately described the current market as a crossroads. There are powerful forces at play in opposite directions that are driving the market.
The Bullish Case
1) EVERY government continues to pour currency into the system to prop up their respective economies. This has the effect of inflating the value of everything measured in currency, including stocks. With this much money going into the system, it has to go somewhere. It has to find its way into commodities and stocks. You do not want to get caught holding cash in an inflationary environment.
2) Profits are up -- Banks are making money. GDP is increasing. Houses are being built. Airplanes are being ordered. Even retailers had a robust 1st quarter.
3) After the pullback, there are some solid P/E valuations available in a number of sectors, but particularly in the small cap and emerging market areas. P/E is inflation neutral.
The Bearish Case
1) The stimulus packages and/or deficit spending policies have put a number of government entities in critical fiscal situations. This includes countries such as Greece, but also many U.S. state governments that are limping along. Banks and other financial institutions that hold this debt are still in more fragile states than their current balance sheets might indicate or disclose.
2) Banks have primarily made their money in the stock market and through carry trades. They still are not lending. Nearly 100% of the mortgages that were booked in 2010 were purchased by government-backed entities Fannie Mae and Freddie Mac, meaning that they government is not just the primary source of lending, but the only source of lending. Banks and financial institutions are borrowing cheap money from the government and then either buying government bonds (and pocketing the difference in interest rates) or using the money to invest in the stock market to juice their returns. All of this profitability is on the government's dime. Pure stimulus. The housing boom caused by the tax incentives is already wearing off and home prices are moving downward and load applications are now at 13-year lows.
3) While P/Es are now realistic, they have not begun to approach historic lows. Bargains are only bargains historically. Profits have been gained by cost-cutting, not hiring. There is very little room for companies to improve their cost-basis.