Stock Market: The Perpetual Profit Machine

Many spectators are surprised: The stock market climbed today on a new multi-year high. How could that be? If we believe the media, the world is suffering under a chain of crisis: Nuclear disaster in Japan, political unrest in the Middle East and high debts of the United States, Greece and other countries. But it seems the stock market doesn`t care. The ongoing rally in the stock market proves that the investors focus on another issue: profits of the companies, and they are rising fast.

The rally on the stock market, which started in March 2009, has now got new legs because we are experiencing another strong earning season. In recent days many companies have reported their results from the first quarter of the year, and many of them beat the predictions of the analysts. In Q1 company profits & revenues climbed faster than expected and the majority of the companies gave encouraging outlooks (guidance) on the current quarter.

The good Q1 numbers aren´t a surprise. Company profits already grew faster than expected last year. Companies are benefiting from the fact that they get leaner and more efficient. The last recession especially forced them to squeeze out a lot of their costs, which now leads to strong productivity gains. Also helpful is the growing world economy, which permits the companies to expand their markets.

But the recent gains are just a part of a long term development. Companies are just a structured cluster of humans, and like them tend to learn. And they learn to get better and better every day. Companies develop new products and tap new markets while reducing their costs. Therefore we can expect that  profit growth will continue in the long run, at least as a trend. This will translate into rising stock prices because the value of a company is just the sum of its profits.