by Joseph R Weiland, CFP®, Managing Partner
When we invest in the stock market we are buying future profits of the businesses that we buy. If we invest across the entire market we are buying the future profits of the entire economy. The Price to Earnings Ratio (PE) tells us what we are paying to buy today’s profits. A PE of 20 means that we are paying $20 for $1 of profit. If the $1 of profit increases the PE stays steady at 20, then the price must move up. When stock prices move up, the Dow increases.
Why will this grow into the future? Three simple reasons. GDP growth (growth of the entire economy), Inflation and improved business productivity. An increase in any of these will cause an increase in the earnings of business. Better run businesses immediately have more money landing at the bottom line. An increased GDP makes the entire economy larger which increases the total earnings in the markets. And inflation will also drive total profits higher.
So unless growth of our economy stops, or innovation stops, our markets will grow. This means, the question is not if the market will reach 40,000, rather when will the market reach 40,000?