This is why the bull market for stocks could continue for years

By Philip van Doorn

Also: Boeing's compelling bonds, new help with down payments and advice for a retiree who is drowning in debt

There are bad days even during bull markets. Long-term investors need to expect them, because a pullback of 10% for a broad index is common within any 12-month period, even if the overall trend is strong. And some bull markets can last for many years, even with those corrections or a crash or two along the way.

Thursday might have been an alarming day if your attention was grabbed by headlines reporting that the Dow Jones Industrial Average DJIA fell nearly 606 points. But that could be expressed differently and more usefully as a decline of 1.5%. Through Thursday, the venerable index had returned 3.7% for 2024, with dividends reinvested. The S&P 500 SPX was down only slightly for the day and had returned 11.1% for 2024.

Now take a look at financial performance that can drive stocks higher over the long term. The S&P 500 is weighted by market capitalization. It is tracked by the $529 billion SPDR S&P 500 ETF Trust SPY, which has a 35% weighting to the largest 10 companies in the index. Now check out how well these companies have been doing, according to their most recent quarterly earnings reports.

First, here are changes in revenue per share (or sales per share):

   Company                           Ticker   Market cap. ($bil)  % of SPY portfolio  Change in quarterly revenue per share from year earlier 
   Microsoft Corp.                    MSFT                $3,174                7.2%                                                    16.9% 
   Apple Inc.                         AAPL                $2,866                6.1%                                                    -1.9% 
   Nvidia Corp.                       NVDA                $2,595                5.8%                                                   262.3% 
   Alphabet Inc. Class A             GOOGL                $2,003                4.3%                                                    18.2% 
   Amazon.com Inc.                    AMZN                $1,884                3.7%                                                     9.1% 
   Meta Platforms Inc. Class A        META                $1,021                2.3%                                                    25.9% 
   Berkshire Hathaway Inc. Class B   BRK.B                  $877                1.7%                                                     6.5% 
   Eli Lilly & Co.                    LLY                   $768                1.5%                                                    25.9% 
   Broadcom Inc.                      AVGO                  $646                1.4%                                                    23.2% 
   JPMorgan Chase & Co.               JPM                   $565                1.3%                                                    20.6% 
                                                                                                                              Source: FactSet 

And here are changes in gross profit margins and operating margins:

   Company                           Ticker   Gross margin  Gross margin, year-earlier quarter  Operating margin  Operating margin, year-earlier quarter 
   Microsoft Corp.                    MSFT          70.08%                              69.49%            54.33%                                  49.00% 
   Apple Inc.                         AAPL          46.58%                              44.26%            33.87%                                  32.92% 
   Nvidia Corp.                       NVDA          78.81%                              64.63%            67.03%                                  35.09% 
   Alphabet Inc. Class A             GOOGL          58.49%                              56.74%            37.51%                                  32.30% 
   Amazon.com Inc.                    AMZN          49.32%                              46.77%            18.99%                                  12.66% 
   Meta Platforms Inc. Class A        META          81.84%                              78.29%            47.83%                                  38.03% 
   Berkshire Hathaway Inc. Class B   BRK.B          21.62%                              18.88%            18.96%                                  15.93% 
   Eli Lilly & Co.                    LLY           80.91%                              76.63%            34.44%                                  28.18% 
   Broadcom Inc.                      AVGO          55.81%                              63.47%            42.97%                                  57.73% 
   JPMorgan Chase & Co.               JPM              N/A                                 N/A               N/A                                     N/A 
                                                                                                                                         Source: FactSet 

A company's gross margin is its net sales, less the cost of goods or services sold, divided by sales. It is a useful measurement of pricing power and core efficiency, and a combination of an expanding gross margin and increasing sales is a good sign.

Operating margin goes further to deduct more overhead and other expenses that aren't directly related to the production of goods and services. It can be summarized as earnings before interest and taxes, divided by sales.

These figures aren't available for JPMorgan Chase & Co. (JPM) because they aren't used in the banking industry. But the bank's net income margin (profit divided by revenue) narrowed to 20.06% in the first quarter from 22.31% a year earlier.

So among the 10 largest companies in the S&P 500, seven increased revenue by double-digit percentages or more, and only one - Apple Inc. (AAPL) - reported a sales decline. Eight of the companies (including Apple) improved both their gross margins and their operating margins. It is remarkable to see an increase of nearly 17% for Microsoft Corp.'s (MSFT) sales per share (along with the margin improvement), considering the company's size and its 7% weighting in the S&P 500.

This growth, improving productivity and the expectation of a continual increase in cash flow underline an argument made by Sandip Bhagat, chief investment officer at Whittier Trust in Pasadena, Calif., against the notion that the S&P 500 is overvalued. The index trades at a forward price-to-earnings ratio of 20.8, based on weighted 12-month earnings estimates among analysts polled by FactSet. That is up from 18.1 a year ago and compares with a three-year average of 19.1.

During an interview, Bhagat, who oversees the management of $22 billion in client investment accounts, said the higher valuation for the S&P 500 reflects the fact that "prices tend to move before earnings do."

"But that is no surprise, because we are all trying to figure out what the future holds," he said. "That is the job of the stock market - anticipating and discounting the future."

Bhagat manages money with a multidecade horizon and suggests that investors worry less about the timing of the Federal Reserve's interest-rate policy. "Technology is such a huge factor cutting across industries that it will unleash productivity growth, which is deflationary in nature. Your labor costs go down, which is a driver of the service economy. And increasing productivity growth also helps economic growth," he said.

Nvidia does it again

Headlines based on corporate financial results typically center on year-over-year comparisons, which for Nvidia continue to be eye-popping. Sales for the company's most recent fiscal quarter came in at $26.04 billion, for a 262% increase from a year earlier. This is because the company continues to dominate what last year was, essentially, a new market - graphics processing units to support the data-processing requirements of generative-artificial-intelligence technology.

But even if you look at sequential increases, Nvidia's numbers are a wonder, with sales increasing 18% from the previous quarter, while profit increased 21% from the previous quarter to $14.88 billion.

Here's a link to MarketWatch's live coverage of Nvidia's earnings announcement and CEO Jensen Huang's conference call with analysts.

More on Nvidia:

Nvidia's stock surge at odds with the S&P 500 - to a degree not seen in 8 yearsNvidia is sporting growth one tech CEO says hasn't been seen 'in the history of capitalism'

Other technology coverage: Intel and AMD take a backseat as Qualcomm plays starring role in Microsoft's AI PCs

These Boeing bonds have a comforting feature

Shares of Boeing Co. (BA) tumbled 8% on Thursday, after the company's chief financial officer Brian West warned that the company's cash burn might accelerate. This was a surprise not only to investors but to some purchasers of $10 billion in new bonds the company issued in April.

But Claudia Assis and Ciara Linnane explained why those new Boeing bonds might be compelling for income-seeking investors.

How about some free help with that down payment?

United Wholesale Mortgage has a new program through which first-time home buyers can borrow up to $15,000 to put toward their down payments, but there is a catch.

More housing coverage from Aarthi Swaminathan:

Mortgage rates fall below 7% for the first time in more than a month - here's how much your monthly payment is if you buy a $400,000 houseHome builders are slashing prices to lure home buyers, but it may not be enough

The stock market points to this presidential election winner

Mark Hulbert looked at over 100 years of data to correlate stock-market and economic indicators to presidential-election outcomes. This candidate is mostly likely to win in November, according to current data.

More from Hulbert: Are market-beating fund managers truly skilled or just lucky?

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05-25-24 0622ET

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