I've got some good news and some bad news.
Let me give you the bad news first: The market's gotten quite expensive. After this huge run, the S&P 500 sells at 20x earnings. That's high historically, not nosebleed, like 29x earnings as we were the week before the Great Crash of 1987. But not cheap like the 15x to 17x earnings range that we have been comfortably surfing for the last few years.
Now the good news. There are really only two ways out of this jam. Either the stock market comes down to make it cheaper or the companies in the S&P 500 start earning more than we expect because things are better than we expect. I believe the latter's happening, that the S&P 500 will turn out to be cheaper than we thought and so valuations may turn out to be less expensive and we will get out of this period without a major correction to cheaper levels.
What makes me so sanguine? OK, let's just deal with companies that reported in the last 24 hours, a period that's pretty representative of the moment.
I want to start with Microsoft (MSFT) and not just because, at $440 billion in capitalization, it's one of the largest companies in the market. Microsoft reported a quarter last night that showed spectacular 100% growth in its cloud business, but more importantly saw better-than-expected numbers in every other business, too, whether it be search or Xbox or its Surface personal computer offering. In fact, the company took pains to talk about how personal computers are selling at better-than-expected levels in the developed world.
Now, I believe Microsoft CEO Satya Nadella is back on track in engineering a turn at the software giant after stumbling the previous quarter. That's why this huge stock has soared more than 6%, powering the entire Dow Jones average to what could be its ninth increase in a row. What's more relevant here, though, is that you can't see this kind of growth across all lines of business for this gigantic company unless you have an economic tailwind going for you, both here and worldwide. In other words, we may be breaking out of the anemic revenue and corporate profit lines that have made the valuations of companies look steeper than they are on forward earnings.
Second instance? Illinois Tool Works (ITW) . Here's your basic industrial company, one of the best-run, that we have highlighted several times as a chicken cyclical, meaning it has a lot of cyclical components to it but it also has enough proprietary business lines that can grow without a strong economy so it won't blow you up in a slowdown.
This maker of industrial fluids, adhesives and tooling, among other products, reported sharply better-than-expected earnings and estimates were already at lofty levels. You simply don't get the kind of earnings estimate beat and boost that ITW delivered, one that has propelled the stock up three bucks to an all-time high, unless you have the economy booming worldwide, as only 46% of Illinois Tool Works' business is domestic.
Then there's Cintas (CTAS) , the company that makes uniforms and provides supplies for fire safety, among other products, for 900,000 businesses. I love to use Cintas as a gauge for small and medium-size business growth. It's pretty much a pure mirror on that portion of the economy. You don't order more uniforms when you are shrinking your workforce.
This company earned $1.08 per share vs. the $1.01 the Street was looking for, but more important, it guided up its revenue estimates substantially. That's a fantastic sign of economic expansion that could ultimately mean things are getting better not just for Cintas, which has rallied $9 on the news, or 10%, but for a whole host of companies.
Microsoft, Illinois Tool Works, all roaring higher today on better-than-expected numbers signaling more robust growth than we thought across the board. That's the benign way you get an expensive-looking market to be cheap. That's how I am betting we will beat the nosebleed and turn out to be in an economic expansion that supports what otherwise would be a stock market I would tell you to sell-sell-sell simply because, like Dustin Hoffman admonished Laurence Olivier in Marathon Man, "No, it's not safe, it's very dangerous. Be careful."