Businesses make a lot of money. And it is the strength of the currency that explains their increasing valuation.
I know pundits are always talking about various political or economic factors, like trade with China, or what the Fed is going to do, or peace in the Middle East, or why New York City might elect a communist mayor. I’m not saying these things don’t matter. And in most cases, President Trump has had one success after another. So it’s a good backdrop for actions. Basically, the stock is only worth what someone is willing to pay for it, and the market as a whole, made up of millions of investors using their wisdom and information, wants to know if a company has a bright future.
So let me repeat my old mantra: Profits are the mother’s milk of stocks. By the way, the earnings outlook, according to FactSet, is quite promising. Future earnings for 2025, almost $300 per share, an increase of 14% for the year. And a multiple of 22.8 times earnings.
The discount rate for the 10-year Treasury note, which is a reasonable discount rate for capitalizing corporate profits into their future value, has remained stable at around 4%. Relatively weak. But again, I want to emphasize the very basic idea that successful businesses must make money. And if they do, investors will buy their shares. And overall, this determines the value of indices like the Dow Jones, the S&P 500 or the technology-heavy Nasdaq.
Steve Moore, senior fellow at the Heritage Foundation, and Art Laffer, former Reagan economist, discuss the strength of the U.S. economy, President Donald Trump’s tariffs and more on “Kudlow.”
Here’s another point: Profits are also the lifeblood of the economy. You won’t have a strong economy if the majority of businesses are losing money, forcing them to lay off workers, leading to lower incomes and lower consumer spending.
But supply side players know to start forecasting by looking at the health of the business. Currently, the booming stock market provides a tremendous boost to confidence in profitable businesses in our country. Well, this booming market is forecasting a strong economy next year and beyond.
In fact, already this year, the second and third quarters could see growth close to 4%, according to the Atlanta Fed’s GDPNow. So, roaring stocks suggest this may continue.
And you know what else? Mr. Trump’s big, beautiful bill cuts corporate taxes across the board. And that will improve profits. And that’s good for stocks and the economy.
