Markets Rising for a Reason

Yesterday, I described some factors that could keep this market moving.

This economy has so much going on under the hood that even today’s stratospheric valuations could be resolved through growth.

What I mean is there are two ways to cure valuations. Falling stock prices provide one way. Rising sales and competitive profits provide the other.

Right now, we have the other.

Sales growth for S&P 500 companies bottomed out in February of this year at 2.8%. They are now double that rate at 5.6%.

Competitive profits (labeled EVA on the right-hand chart) bottomed last December, increasing over 8% in the 10-ish months since.

And with declining interest rates reducing the cost of capital going forward, competitive profits will continue to rise, even should sales stop growing – which they won’t.

It’s a double-whammy tailwind that could rationalize the current 6,100 on the S&P 500 Index without the pain of a bear market.

But the real growth driver going forward is innovation.

Just yesterday, Google demonstrated a breakthrough in quantum computing, taking 5 minutes to perform a calculation that would take other computers so long that it’s hard to express as a number.

AI, automation, space commercialization, scalable nuclear power, and quantum computing will converge into a massive innovation wave that will dwarf all such waves in the past.

The Sixth Wave of Innovation is coming on fast. Markets see it coming.

And here’s a reminder of just how powerfully transformative each wave can be.

From the First Wave to the Sixth

Think Free. Be Free.

Don Yocham, CFA

Managing Editor of The Capital List