What Fuels a Stock Market Bull Run?
A bull run in a stock, whereby its price keeps rising, is generally propelled by a mix of drivers that reflect robust underlying business performance and investor confidence. The breakdown follows:
- Expansion in Operating Margins
When a firm’s operating margins expand, it indicates that it’s getting more profitable from its core business. This expansion tends to arise from a number of favorable events:
- Pricing leverage: The firm is able to increase prices without a loss of much business, reflecting a strong brand or specialized product.
- High entry barriers: It is hard for new entrants to come in, safeguarding the firm’s current market share and price.
- Less competitive sector: Fewer competitors translate to less pressure on margins and pricing.
- Low raw material prices: Lower input prices directly enhance profitability.
- Sales growth escalation: With increasing sales, fixed costs are shared across a bigger revenue base, enhancing margins.
Margin expansion of the operating kind is a prime signal of a healthy and efficient business and hence an important driver for investor attraction in the case of a bull run.
- Price-to-Earnings (P/E) Expansion
P/E expansion happens when investors are ready to pay a higher multiple for the earnings of a company. This tends to take place when a stock is found to be undervalued when compared to its peers or to its growth prospects. A number of factors may drive P/E expansion:
- Undervaluation: The stock is currently quoted at a lower P/E ratio than industry norms, global equivalents, or its historical track record.
- High sales growth: Future strong sales growth expectations make investors eager to pay a premium for future earnings.
- Government attention/beneficiary of policies: Those firms that are indirectly benefited by positive government policies or economic initiatives can experience rising investor interest and P/E multiples.
Fundamentally, P/E widening indicates rising investor confidence and a re-rating of the company’s future prospects.
- Strong Earnings Per Share (EPS) Growth with Topline Growth
EPS growth is a direct test of the profitability of a company per share. But to be a genuine indicator of health, it must be supported by revenue growth. This indicates that the company is increasing its top line (sales) and efficiently converting that into profit increases.
It’s also worth checking whether the business is capital-intensive:
- Capital-intensive companies: These companies need a lot of continuous investment in assets (such as machinery or infrastructure). Although their EPS can increase, their share price will appreciate only meaningfully during an extremely good bull market when capital is abundant and investors are more risk-happy.
- Less capital-intensive enterprises: Businesses that do not demand much capital are usually more resilient. Their stocks can rise even in less optimal market environments (bear runs or sideways markets) since they produce greater free cash flow, which can be reused or paid back to shareholders.
In short, a long bull run in a stock is a combination of events reflecting the intensifying profitability of a company, its relative attractiveness to the market, and capacity to deliver robust earnings from expanding revenues.