Stock Market Upward Trend Driven by Strong Earnings Growth

We are closing out 2024 with a bit more volatility than normal, but the overall trend remains up. To everyone who stops me on the street and asks me, 'Why is the stock market up so much?,' I give a fairly simple answer: It's because the overall profits and margins remain at near record levels. If people persist and ask, 'Why is Nvidia up more than 180% this year?,' again, it's a simple answer: That's because Nvidia (and Broadcom ) is where the big profit growth is.

The direction of profits is the most important determinant of whether stocks go up or down A stock is an investment vehicle to participate in a future stream of cash flow, whether it's in the form of retained earnings, dividends or buybacks. The most important factor is the direction of earnings: Are they growing or shrinking? By how much? If there is confidence earnings will be growing in the foreseeable future (realistically, that is one to two years out), investors may be willing to pay more for that. That is why 'growth' stocks have a higher price-to-earnings ratio than 'value' names that do not have stronger growth prospects. Investors follow the direction of earnings growth The S & P 500 is expected to see an overall earnings increase of roughly 10% this year, marking a fourth year of earnings growth. Next year is also expected to see earnings growth. S & P 500 Earnings Growth: 2021: up 52% 2022: up 4.8% 2023: up 4.1% 2024: up 10.2% (est.) 2025: up 14.3% (est.) Source: LSEG Even more important, corporate America is still retaining a very large share of the profits compared to the revenues. The estimated net profit margin (the percentage of revenue that remains as profit after all expenses, taxes and costs have been deducted) for the S & P 500 for 2024 is 12.0%, which is near a record and above the 10-year average of 10.8%, according to FactSe

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