Businesses are making good money. And that’s the strong currency behind their rising valuation.
I know that experts always talk about various political or economic factors, like the China trade, or what the Fed’s gonna do, peace in the Middle East, or why might New York City elect a communist mayor. I’m not sayin’ these things don’t matter. And in most cases, President Trump is carving out success after success. So it’s a good backdrop for stocks. Fundamentally, the stock is only worth what someone will pay for it, and the overall market with millions of investors using their wisdom and information, want to know if a company has a good future.
So let me repeat my age-old mantra: profits are the mothers milk of stocks. By the way, the outlook for profits, according to the FactSet is pretty spiffy. Future earnings for 2025, nearly $300 per share, that’s a 14% increase for the year. And a multiple of 22.8 times earnings.
The 10-year treasury, which is a reasonable discount rate to capitalize corporate profits into their future value, well that’s been steady at around 4%. Relatively low. But again, I wanna emphasize the very basic idea that successful companies have to make money. And if they do, then investors will buy their shares. And in the aggregate, that determines the value of indexes like the Dow Jones, or the S&P 500, or the tech-heavy Nasdaq.
Here’s another point: profits are also the lifeblood of the economy. You’re not gonna have a strong economy if the majority of businesses are losing money, which would then force them to lay off workers, which then depresses income and consumer spending.
But supply-siders know you need to begin the forecasts by looking at the health of the business. Right now the booming stock market that is giving a tremendous boost to confidence in our nations profitable businesses. Well, that booming market is predicting a strong economy next year and beyond.
In fact, already this year, the second and third quarters may be rising at close to 4%, according to the Atlanta Fed’s GDPNow. So, roaring stocks suggest that this can continue.
And you know what else? Mr. Trump’s one, big, beautiful bill cuts taxes for businesses across the board. And that’s gonna improve profits. And that’s good for stocks and the economy.
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