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Expand chart
Data: FactSet; Chart: Axios Visuals

The stock market’s recent trend could be described as just going higher — with the S&P 500 setting its intraday record high of 4,257 on Tuesday. Despite bubble concerns and pockets of investing mania, fundamentals are supporting it.

Why it matters: The stock market has rallied almost unabated in the past year, more than recovering all of its early pandemic losses, leading some to question if prices have detached from economic reality and gotten frothy.

Be smart: No discussion on stock prices is complete without addressing earnings, specifically expectations for earnings growth. After all, the theoretical value of a company is the present value of all of its future earnings.

What they’re saying: "The rally in stocks over the past year has been driven entirely by fundamentals," Credit Suisse’s Jonathan Golub wrote in a research note, adding that the trajectory of stock prices and the earnings expectations have been rising almost hand in hand as seen in the chart above.

The other side: Skeptics note that the market’s valuation — as measured by the ratio of price divided by expected earnings — is around 21. This is significantly above its 10-year average of 16, suggesting that stocks may be overvalued.

Yes, but: Many experts ranging from the billionaire investor Warren Buffett to the Fed chair himself Jerome Powell have long argued that historically low interest rates justify elevated valuations like what we're seeing today.

The bottom line: Stocks are inherently risky, so there will always be reasons to be worried about prices falling. But lack of earnings growth is not one of them. And earnings growth is the most important driver of value.

Go deeper

Fed may raise rates sooner, as inflation is higher than expected

Feb chair Jerome Powell. Photo: Susan Walsh/Getty Images

The Federal Reserve kept rates unchanged at its latest policy meeting, but a shift in sentiment emerged as to how soon it should begin raising rates.

Why it matters: The Fed's rock-bottom rates policy and monthly asset purchases helped the U.S. markets avoid a meltdown during the COVID-19 crisis last year. But as the economy recovers, a chorus is growing for the Fed to at least consider a timeline for pulling back its support before things get overheated.

Jun 16, 2021 - Health

Higher prices drove up Medicare drug spending, advisers say

Medicare spent $7.3 billion on blood thinner Eliquis in 2019, before rebates. Photo: Daniel Acker/Bloomberg via Getty Images

The amount Medicare spent on drugs that are dispensed at pharmacies increased 26% from 2013 through 2018, members of the Medicare Advisory Payment Commission wrote in their new annual report.

Why it matters: MedPAC members put the spotlight on pharmaceutical companies, attributing "nearly all of the growth ... to higher prices rather than an increase in the number of prescriptions filled by beneficiaries."

Updated 2 hours ago - Health

CDC: Vaccinated people in COVID hotspots should resume wearing masks

CDC director Rochelle Walensky and top infectious disease expert Anthony Fauci at a Senate HELP committee hearing. Photo: J. Scott Applewhite-Pool/Getty Images

The Centers for Disease Control and Prevention issued updated guidance on Tuesday recommending that vaccinated people wear masks in indoor, public settings if they are in parts of the U.S. with substantial to high transmission, among other circumstances.

Why it matters: The guidance, a reversal from recommendations made two months ago, comes as the Delta variant continues to drive up case rates across the country. Millions of people in the U.S. — either by choice or who are ineligible — remain unvaccinated and at risk of serious infection.