Question: This past weekend, I was asked by several investors, “Why do stocks keep rising?” Stocks keep hitting new highs because companies keep making more and more money. The single-biggest key to the surge in the S&P 500 since the March lows has been earnings growth, especially tech earnings growth. That was on display again last week as DELL and SNOW reported huge revenue and earnings growth, and these stocks jumped more than 30% after the results.
The power of this earnings growth can best be demonstrated by Micron (MU), which has been the “star” stock of the past three months and has rallied more than 100%. But underscoring how this is earnings driven is the fact that, despite rallying more than 100% in three months, Micron is trading around 10X forward earnings—an incredibly cheap valuation because the earnings are rising just as fast as the stock price!
That reality drives home the fact that the gains in stocks, the reason stocks keep rising, is exceptional earnings growth. That’s a very good thing because it’s one of the “best” reasons stocks can rally. However, that doesn’t mean the rally is infallible. The earnings growth that’s occurring is being driven by massive data center buildout, so for earnings to keep rising like this, the money has to keep flowing in data centers. If there’s any hesitation or disappointment in that, then we will see the rally of the past few months reverse, and in a hurry.
Bottom line, while there are other influences on the markets, the reality is this is an earnings-driven market, and as long as earnings keep blowing past expectations, it’ll be hard for the market not to rally. But that does leave it very vulnerable to disappointment, so we need to keep watching earnings closely to avoid getting blindsided by an air pocket (and we will do so).