Kudlow’s Money Politics

Profit Recovery Is the Mother’s Milk of Stocks

As I’ve written many times before, profits are the mother’s milk of stocks, and for that matter, business and the entire economy. And what we witnessed Wednesday in a big market rally was the return of earnings to the center stage.

Not just Intel’s numbers. And not just Apple after-the-bell. But industrial companies like Honeywell and United Technologies, and consumer companies as well. Ultimately, the recovery in profits over the past two years has been the backbone of the stock market’s big rise.

Here’s another point on profits: Don’t overlook the important role productivity plays in American business. It’s running a solid 2.5 percent, and is even higher in manufacturing and hard goods.

Look, American companies are very efficient. They are not in decline.

In fact, firms from all over the world are borrowing successful methods from American businesses and producing much more than folks think. And that’s why the global economy is stronger than many people probably think.

Of course, I’d like to give American businesses greater incentives to create more jobs here at home. But we are still — in the U.S. — the best in business in the world. Washington needs to keep it that way with more free-market policies, as opposed to suffocating tax and regulation policies.

Another point on the Wednesday rally is this business of the falling dollar. I hate it. I’m a King Dollar man. Link the greenback to gold.

But let me go out on a limb here: If we get a debt-ceiling increase with enforceable spending limits, and if the ultra-easy Bernanke Fed finally ends its pump-priming QE2 overprinting of new dollars, then we could see a dollar stabilization, or even a dollar rally, before long.

I hope so. I don’t want the dollar to lose its status as the world’s reserve currency.

So, might a stronger-than-expected dollar hurt stocks? In the short run, a brief correction is certainly possible. So, yes. But in the long run, healthy and profitable business is always the key to the stock market.

Profits matter.

Larry Kudlow — Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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