Five Theories on Why U.S. Stocks Keep Hitting Records

The Dow Jones Industrial Average crossed 22000 for the first time Wednesday. Here are some of investors' theories for why the stock market keeps rising.

Stocks Reflect the Resurgent Health of American Corporations

The biggest U.S. corporations are on stronger footing. With most S&P 500 companies having reported second-quarter results, firms are on track to post another quarter of strong profit growth -- building on gains from the end of last year, when companies snapped a five-quarter streak of earnings contraction, according to FactSet. The rebound has been broad, reflected not just among oil firms -- which have recovered along with oil prices -- but also in tech giants like Apple Inc. and economic bellwethers like Caterpillar Inc. Those who believe the stock market's trajectory is ultimately determined by the rate of earnings growth say continued strength among U.S. firms should help fuel further gains in the stock market.

The Global Outlook Is Looking Brighter

Economists are projecting a pickup in global growth, while the U.S. expansion remains slow and steady -- a combination that investors say has helped boost multinational companies, which have been among the best-performing stocks this year. Boeing Co., Apple and McDonald's Corp. made up the bulk of the gains that pushed the Dow industrials past 22000 for the first time. Profits at such firms may get an additional boost if weakness in the U.S. dollar persists, because it makes their exports cheaper to foreign buyers. The WSJ Dollar Index, which measures the currency against a basket of 16 others, has fallen 7.5% this year through Wednesday.

The U.S. Economy Is in a 'Goldilocks' Situation

Investors are currently contending with a rare but favorable environment: an economy that is expanding but not fast enough that the Federal Reserve is in a rush to raise interest rates. The unemployment rate fell to a 16-year low in May, yet inflation has remained stubbornly below the Fed's 2% target -- suggesting to many investors that the central bank is unlikely to raise rates aggressively. Many analysts caution the so-called Goldilocks scenario is unlikely to last. But for now, "in a period where accommodation remains very aggressive, all of this is coming together to keep the markets afloat at these higher levels," said Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute.

Passive Funds Are Propping Up Prices

One hallmark of this year's stock-market rally is the relentless flow of money into index-tracking mutual and exchange-traded funds. Some $128.6 billion has moved into U.S. index-tracking funds that own U.S. stocks in 2017 through June, while a net $99 billion was withdrawn from actively managed U.S. stock funds, according to Morningstar Inc. Buying of passive funds is partially offset by the money flowing out of active ones, but some investors warn that the rising popularity of index funds that own hundreds, sometimes thousands of stocks, translates into indiscriminate buying divorced from corporate fundamentals. One concern is that persistent index buying elevates valuations across the board and that, should market turmoil erupt, investor index buying would turn to selling, leaving the broader market acutely vulnerable.

There Is No Alternative

In a low-rate environment, one reason investors say the stock market keeps rising is simply that there is no alternative for returns. After an initial selloff following Election Day, U.S. Treasurys are back roughly where they began the year, with the yield on the 10-year note at 2.264% Wednesday, compared with 2.446% at the end of 2016. Many bond investors believe yields are likely to stay relatively low unless there are signs that inflation is picking up or Congress is able to push through potentially growth-boosting policies like fiscal stimulus. For now, with bonds offering paltry yields, many investors begrudgingly say stocks remain their asset class of choice -- even if they are getting increasingly nervous about the long stock rally.

Write to Akane Otani at akane.otani@wsj.com and Chris Dieterich at chris.dieterich@wsj.com

(END) Dow Jones Newswires

August 03, 2017 10:21 ET (14:21 GMT)