Two factors move stock prices, earnings and sentiment. Earnings tend to be backward-looking, while sentiment tends to be forward-looking. In market parlance, multiples or valuation ratios (price/earnings, price/book, price/sales) measure sentiment.

Stocks prices increase when earnings increase, sentiment increases or both increase. Consider this example: The earnings across the S&P 500 approximate $100 with a valuation multiple of 14x (for a current index level of 1400). A 10 percent increase in total earnings (holding valuations constant) to $110 would elevate the market to 1540. Likewise, a 10 percent increase in the valuation multiple (holding earnings constant) would also elevate the market to 1540. Facts and feelings alike!

Today, with the global economy slowing and earnings growth flat-lining, dramatic gains in earnings can be hard to find. With earnings flat, capital gains in stocks require sentiment gains in multiples.

The Gains in Spain

Can the United States of America continue on without Hawaii? Probably. Can Europe continue on without Greece? Probably.

Can the United States continue on without California? Probably not. Can Europe continue on without Spain? Probably not.

Would the US fight to keep California? Yes. Will Europe fight to keep Spain? Yes.

In a late-May weekly missive, we claimed that “In the big game of global macro investing, what is most determinant of future investment returns is not which party is in charge, what the economic growth rate is, what war may be imminent, or which country may default. What is most important is ENTRY POINT VALUATION.”

On that day the Spanish stock market traded at 6.6 times earnings versus 17 times in the stalwart USA. A few days later, ECB Chief Mario Draghi pledged allegiance to the Euro’s continuance.

Talented market observers recognized that commitment to the Euro implies commitment to Spain. This led to an immediate re-calibration of sentiment.

Since the beginning of June, the Spanish stock market has appreciated 25 percent. Yes, 25 percent! And Spain’s in a depression!

Why the rally? Because Spain was priced for death, and Dr. Draghi took the call. This does not mean that Spanish earnings suddenly exploded, but that sentiment simply spiked above despondency.

In an emotionally charged market environment, turmoil turns over opportunities.

However, not all turnips turn to gold. Over the same period, the Greek stock market, far cheaper than the Spanish stock market, appreciated 9 percent in line with the relatively expensive US market.

This demonstrates that in the hunt for multiple expansion opportunities, low valuations themselves aren’t enough. Catalysts (Like ECB support for Spain) are necessary to unlock valuation potential.

As we survey the globe, most international markets, including the emerging markets, trade well below their historic average valuations. With earnings held constant, the outperforming areas must hold potential for improvements in sentiment.

Anything less than disaster in Europe or economic collapse in the emerging markets could provide investors with surprising gains – like those in Spain.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.