Every day at 5i Research, we get questions along the following lines: “Why is the market doing so well? There are lots of problems in the world, but people just keep on buying. What gives?” Well, as you know, there is always something to worry about in the market. The market, as they say, “climbs a wall of worry.” We are of the view that when there is nothing to worry about, that’s the time to be really concerned and maybe raise some cash. But, in our long investment career, we have never seen even a day in the market where there was not some big concern or another. But, to answer the first question, let’s take a look at five possible reasons why the market has been doing so well.

Investors have been trained (and rewarded) to buy the dip

With markets at all-time highs, every single dip in the market has worked out for investors on the buy side, at least so far. With investors trained to buy the dips, for at least since the start of the COVID-19 pandemic, every single correction has seen new buying step in to support the market, and investors have made money. These investors are quick to show up when the market dips and they drive prices back up again, or, at least, help stem the decline. Other investors — those anticipating a correction — never seem to get the correction they are waiting for, so their money has to come back into the market at higher prices.

Earnings are surprisingly good

For this year, looking at

S&P 500

earnings, just completed third-quarter earnings growth is projected at about eight per cent year-over-year, marking the ninth consecutive quarter of earnings growth for the index. For the full year, earnings growth is expected to be around 10.9 per cent to 11 per cent, with revenue growth of about 6.1 per cent. Looking out to next year, earnings growth is forecast to accelerate, with estimates around 13.8 per cent year-over-year, according to data firm FactSet Research Systems Inc. Revenue growth for 2026 is estimated around 6.6 per cent. Earnings truly drive the market, and the surprisingly robust showing — even in the face of tariffs and a possible

recession

— has made investors confident enough to spend their cash.

Interest rates have dropped in the U.S. and Canada, and are headed lower

If earnings are one main driver of the market, interest rates are the other. We have already seen several rate reductions in Canada, and one in the U.S. More are predicted for each side of the border. Lower rates have a direct impact on corporate profits, through lower interest charges, but they also make stocks more attractive in comparison to fixed income investments, as yields on those decline. Today, you might get 3.65 per cent for a one-year Guaranteed Investment Certificate (GIC). Many Canadian stocks already pay more than that in dividends and with the dividend tax credit, the stocks are starting to look pretty good to income investors.

Many investors view stocks as ‘better’ than government debt

This is a very intriguing theory as to why markets are so strong. Essentially, it comes down to this: Why would you ever want to give money to governments (via

government debt

) when most are, essentially, insolvent, running huge deficits year after year. Sure, government debt is guaranteed, but if governments are just “printing money” to pay you back, how valuable is this guarantee anyway? Meanwhile, there are hundreds of companies in North America that have rock solid assets — assets you can touch and see. And many are sitting on tons of cash, rather than trying to sell more debt just to survive.

Berkshire Hathaway Inc.

, of course, famously has more than $300 billion sitting in cash. America has about US$38 trillion in debt. Which do you think has more credit risk? Investors are buying stocks to own something rather than being owed something.

Young investors have adapted the ‘passive investment’ mantra

Many young people today are frustrated. They can’t save $250,000 to put a down payment on a house, so they are turning to investments instead. Rather than putting savings into a bank and earning one per cent interest, they are reading stock forums and buying up

meme stocks

in the hope of making a quick score. These will rarely work out, but there are millions of other investors who are doing things right: investing on a regular basis, investing for the long term and buying quality companies. There is a whole movement of young people who think working for someone else for 40 years is a mug’s game, and the only way to break that cycle is to invest. Honestly, they’re not wrong. These young investors may not have much money now, but with millions doing the same thing it can still be a powerful driver of markets.

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Peter Hodson, CFA, is founder of 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)

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