Stock Market: Ignore Morgan Stanley

(Drivebycuriosity) - If we believe Morgan Stanley than the US stock market will stagnate in the coming years. The bank predicts that the S&P500, the gauge for the US stock market, will stick in a range of 2,400 and 3,000 points for several years (marketwatch ).  Yesterday the S&P 500 closed at 2,904 points, so the stock market would go nowhere. They claim that this "rolling bear market" had already started. This is just nonsense.

First, nobody can foresee the future. Stock market movements are unpredictable. If banks were better in guessing the economy & the financial markets, they would not have to be saved in the 2008 crisis. But we can think in probabilities. There are many catastrophes possible: The world could get hit by a major meteor, volcanic eruptions could cause a nuclear winter, a global epidemic could kill many millions etc.  Fortunately the likelihood for these events is very low - and so is the probability for a stock market stagnation over the next years.


                                        Stocks Follow The Company Earnings

Morgan Stanley claims that the current bull market, which hiked stock prices more than 300% since spring 2009, is fueled by an expansive monetary policy, meaning low interest rate rates and bond purchases, which is now coming to an end. But the monetary policy is just a part of the story. Since 1950 the S&P 500 rose on average annually 6.7% , even that dividends are not included (annually 2-3%  driveby),  faster than the economy, which grew 2 - 3% annually, because stocks follow the company earnings, which are rising much faster than the economy.

Rising company profits are the engine of the current bull market and are responsible for the more than 300% gains. This year US company profits are rising more than 20%.  Even without the tax cuts by the Trump administration they are climbing more than 10%. The growing profits are keeping stock valuation (price-earnings-relations) reasonable and are overcompensating the negative effect of climbing Fed interest rates.

I assume that company earnings will continue to grow with double-digit rates because fast rising company earnings are a long term trend. Corporations are getting more efficient & more productive over time - thanks to learning processes and the technological progress. They are learning organisms because they are managed by humans who are 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.

Company earnings are also boosted by automation.  Since the early 18th century (the first industrial revolution) the technological process has been enabling companies to produce more goods & services with the same amount of employees. More and better machines are doing the work of people which translates into lower costs, higher profit margins and climbing earnings.

It seems that this process is accelerating again and we are at the begin of new industrial revolution. We are experiencing a rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, manage customer relations and so on. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are also beginning to use 3D-printers to become more cost efficient and flexible.

Ignore Morgan Stanley.