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One of the biggest points of contention in the equity market right now is whether the ongoing bull market is warranted or based on misplaced optimism. Often called the “most hated bull market in history,” the post-November run-up in equities, especially in the United States, has been criticized from many angles. While it’s impossible to list all of the points of contention, the biggest three are:

  1. Fundamental demand in the U.S. is too weak, as evidenced by labor force participation rate, inflation, and sales growth trends.
  2. Political uncertainty and instability from a Trump presidency will threaten growth.
  3. “Artificial” drivers for the market, especially the Federal Reserve and other central banks’ easy monetary policy, are unsustainable tailwinds for equities.

Countering any one of these points leads to a quagmire of uncertainty and point-counterpoint debating that gets one nowhere. While macroeconomic strategies do work as an investing principle, and have been used successfully by many hedge funds over the last decade, the reality is that those strategies are based on a guiding theoretical starting point that is then modified by incoming data instead of switching based on changing data. If you believe quantitative easing programs and their unwinding is fundamentally bad, then you will short the market no matter what. If you think these programs are declining in relevance for equity performance, you will ignore this argument entirely as irrelevant to your basic assumptions about how equity markets work.

So if we want to have a macroeconomic principle to guide our investing, we can either accept that the U.S. and global economies are fundamentally flawed and at risk or we can assume that there has been a different and more promising trend developing around the world. Arguing with the other side might be entertaining, but is ultimately a profitless diversion.

A more fundamental, bottom-up approach to investing, as championed by famous value investors such as Warren Buffet and Seth Klarman, would ignore the debate entirely and focus on fundamental data. Of course, fundamentals will vary between companies; good firms will have good numbers and bad firms will have bad numbers. But an aggregate perspective will indicate whether there are enough fundamentally good stories out there to justify a positive market outlook.

To determine whether that is the case, we need to look at earnings growth.

Of course, revenue is the most desirable growth driver for any investor. It is a clear indicator of market demand for a firm’s output, and management cannot fudge this number in the same way that they can earnings. Thus, for instance, IBM (IBM) has demonstrated declining market demand for its products, as evidenced by a continual decline in revenue. Google (GOOG), on the other hand, has shown continued higher market demand for its products with strong revenue growth. This is the kind of distinction that is most desirable for value and growth investors alike.

However, when it comes to very large cap firms that are likelier to be “good” rather than “bad”, their sheer scale makes revenue growth often hard if not impossible. Eventually, the “law of large numbers” comes into play where a large firm has dominated so much of its market that there’s little room to grow sales. At that point one must roll up one’s sleeves and look deeper at the balance sheet and income statement to get an understanding of what’s really going on with earnings and come to a conclusion whether earnings growth is attractive enough to invest.

From a broad point of view, it looks like earnings growth is becoming easier to find. According to recent Factset data, earnings growth continues at a similar pace to last quarter. While we haven’t seen a lot of companies report earnings for the second quarter, we have seen earnings 8.2% above estimates. Those firms are reporting 6.8% earnings growth, which is less than the 9% or so earnings growth of the first quarter, but still strong enough to indicate growth remains common enough for value investors to chase.

As for sales—we’re also seeing strong revenue growth, with 4.8% revenue increases across S&P 500 companies. What’s also quite interesting is that one of the hot topics touted by bears is vanishing from the minds of management. According to FactSet, President Trump is no longer a talking point during earnings releases, indicating that firms are focusing their time and energy on other topics.

FactSet has released a number of other interesting data points worth reading in their report, including an analysis of earnings guidance and growth expectations for both sales and earnings. Management seems to be significantly more optimistic about growth potential, which has been unusual since 2008-2009. Individual investors and analysts should take a closer look at exactly what’s driving their optimism before deciding whether to be a bull or to hate this oft-hated bull market.

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