In yesterday’s post about revenue growth and profit margins, we talked about how the significant tailwinds that have benefited the markets over the past couple of years may well be playing out. With that in mind, if company earnings are looking to—at best—grow at significantly slower rates than they have over the past couple of years, does that mean similar results for the stock market?

Not necessarily. Stock prices are based on shares, not companies. The relevant metric, therefore, is earnings per share (EPS), not company earnings. The two are obviously connected; however, while company earnings growth may slow, EPS growth doesn’t have to lag to the same extent.

We’ve hit a record with the Dow and are getting very close with the S&P 500. Excitement is building, and the expectation is that stock prices will continue to rise. They may, for a while, based on the psychology alone, but as I discussed in the CFA Institute post last week, the financial fundamentals have to come into play at some point.

Ultimately, for a market rally to be sustainable, earnings per share—the metric that defines the financial benefit to shareholders—has to increase. The question now is whether the current rally is actually based on increases in earnings and, if so, whether that growth can continue.

— Guest post from Peter Essele, CFA^®, senior investment research analyst

To assess the riskiness of the highest-yielding area of the bond market relative to that of the equity market, we produced the chart below. The line shows the difference between the average yield for the high-yield market and the average yield for the top 10 percent of securities in the S&P 500. For instance, the current reading of 0.45 is the result of subtracting the average yield of higher-yielding equities (5.33) from the average yield in the high-yield market (5.78).

I am rather proud of that title. How often do you get to riff on Bill Gross (“the new normal”) and Michael Lewis (The New New Thing) at the same time? As a bonus, I think it actually reflects what we’re seeing as the economy and markets evolve.

The New New Thing, for those too young to remember, is a book about Jim Clark and his role in the new Internet economy. It’s a great read and recalls a time when everything seemed possible, when we were entering a new economy and it really was different this time. Freed from the constraints of geography (and profitability), Internet companies were going to change the world.

I want to do something today that I do not do that often: make a specific case for something. Ordinarily, economics is very much a nuanced “on the one hand/on the other hand” subject—to the extent many wish for a one-armed economist. Today, though, I want to make the case for a strong U.S. recovery.

Let me be clear. I am not pounding the table on this. I still don’t consider it the most probable case, and there are certainly enough factors out there that could derail it. The news keeps surprising to the upside, however, and I think it makes sense to look at how we could continue to be pleasantly surprised as the recovery starts to gear and turn really strong.

Recently, I was invited by the CFA Institute to contribute some thoughts to a discussion of investment versus speculation and how you can tell them apart. My commentary was published, and I’ve received some very nice feedback on it. You can read it here.

Yesterday, the Dow Jones Industrial Average hit a new record, up from its previous all-time high in 2007. As I have mentioned before, new records are generally a sign of market strength, at least for a while, and can spur more buying as investors fear missing the boat.

Markets take a roller-coaster ride

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