Stock prices may be hitting new records, but this is no time to sell. In recent decades, the U.S. economy and corporate sectors have undergone wrenching changes – Big Tech and energy, not the Big Three and finance, now drive progress – but America has emerged stronger and on the cusp of a new prosperity. For 2018, the global economy is poised for banner growth. Most of the strong global brands – and strongest high tech businesses – remain American, and firms like Apple and Netflix will profit greatly. The recent run up in stocks has been driven most fundamentally by strong profits growth in the second and third quarters. The closely watched S&P 500 Index, which comprises about 80 percent of U.S. publicly traded companies, has a price-to-earnings ratio of about 25. That key indicator of whether stocks are too high or too low is about the same as a year ago and still in line with its 25-year average. Analysts are forecasting earnings growth exceeding 10 percent over the next three quarters. That puts the forward the price-earnings (P-E) ratio at only 18 and makes another jump in stock prices wholly possible if investors continue their confidence in the Trump Administration’s commitment to pro-growth tax and regulatory reforms. Importantly, inflation remains in check – the recent surge in gasoline prices is receding. Hence, the Federal Reserve will only raise interest rates slowly and the return on investments in Treasuries, CDs and other fixed income investments will remain quite low. Even with somewhat higher interest rates, the P-E at 25 implies a rate of return on stockholder invested capital of 4 percent on shareholder equity. Investors can’t get anywhere near that on long-term Treasuries or CDs. Adding in expected earnings growth, the returns on stocks should be much higher. Over the last 25 years, the return on the S&P 500 has averaged 11 percent but only about 3 percent on long-term Treasuries. At the same time, sustainable long-term P-E ratios appear to be rising. In this century, new value creation is premised much more on intellectual property – for example, computer apps that create companies like Lyft and artificial intelligence that power the robotics revolution – and less on hard assets – in particular, industrial buildings and factory equipment. This trend greatly reduces the amount of financial capital businesses must reinvest or raise to introduce new and better products – the foundations of higher earnings and American wealth. Consider that Google was launched with only $25 million in 1999 and grew into a $23 billion enterprise at its initial public offering five years later – that story repeated at ventures like Facebook, Snapchat and many others. Similarly, as industrial era enterprises like Ford and IBM rely more on software to create value in products sold – for example, driverless vehicles and Watson – and innovations like 3D printers and flexible robots make machinery investments more versatile and productive, the demand for private capital to finance expensive purchases of physical assets becomes more limited. This is an important reason why established companies are flush with cash – they simply need to spend less on new buildings and hardware to improve productivity, expand product offerings and launch new ventures. Lower capital requirements coupled with an abundance of investable funds are pushing down the rate of return needed to attract new capital into business ventures. In turn, that pushes up the P-E ratios equity markets can sustain. For stocks overall, a long term P-E ratio of 35 now seems reasonable if the Trump administration can keep the business environment positive with responsible tax cuts and regulatory reforms. My advice for ordinary investors remains the same. Don’t try to pick stocks or time the market – broadly diversify and invest for the long term. Those nearing retirement should keep about half their money in fixed income vehicles with maturities of less than three to five years, and invest in a low cost S&P 500 index fund offered by USAA or a similar service. And perhaps an international index fund to smooth returns – sometimes U.S. equities do better while other times foreign stocks lead. If you’re younger, put aside some cash for emergencies or upcoming commitments like college tuition and invest a reasonable amount each month in a similar basket of equities, follow that discipline through thick and thin, and you’ll do well. Published in Daily Times, October 30th 2017.