Saturday, July 29, 2017

Stock Market: What Really Counts

(Drivebycuriosity) - The media are obsessed with politics. They focus on President Trump, his Russian connections, his tweets and his struggles with health care reform & the political opposition. But the stock market doesn`t care. Last week the S&P 500, the gauge for the US stock market, hit a new all-time high and gained 10% year-to-date and climbed about 14% in the recent 12 months - even though the new US president didn´t accomplish much so far. The bull market, which started spring 2009, is still alive and kicking.

The rally shows what really counts for the stock market: Swiftly climbing company earnings. We are in the middle of the earnings season. More than half of S&P 500 members have reported their second quarter 2017 earnings. Total earnings for these companies are up +11.3% from the same period last year on +6.1% higher revenues, with 74.5% beating EPS estimates and 69.2% beating revenue estimates (nasdaq).

So company earning are rising almost as fast as the stock prices, keeping valuations reasonable (price-earnings-relations). Why can profits climb so fast in a slow growth economy? Company earnings are rising faster than the national incomes (GDPs) because corporations are getting more efficient & more productive over time - thanks to learning processes and the technological progress. The skeptics underestimate how good leading companies are at squeezing out climbing profits even in a sluggish economy. They are learning organisms because they are managed by humans who are getting better and better over time by continuously improving themselves and their companies. 

During the recession 2008 companies had restructured and reduced costs significantly in order to survive. Now they are more fit & more efficient than before. Companies are also benefiting from a new industrial revolution: Advances in Internet, artificial intelligence, 3D printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets. And they are receiving solid tailwinds from the emerging markets which are getting stronger. The catching-up process in China, India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy that creates continuously rising revenues & profits for global companies.

I believe that the learning process will continue and will translate into a long term trend of rising company profits, the engine of the stock market rally. Investors might forget about politics and focus on what really counts.

PS For illustration I choose one of Andy Warhol dollar signs from 1982. 


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