The Dow Jones Industrial Average hit another record high Friday, on top of its record-breaking rally yesterday. It brought to my mind not the laws of finance, but the laws of physics.

I remember learning in middle school about Sir Isaac Newton’s first law of motion: an object at rest stays at rest and an object in motion stays in motion unless acted upon by an unbalanced force. Expressed in Wall Street parlance, the trend is your friend.

Trade war, hotter inflation, rising interest rates… no “unbalanced force” seems able to stop the Dow’s forward motion, as industrials shake-off trade war fears to focus on positive fundamentals.

The Dow today reached a six-month peak, but the S&P 500 and Nasdaq retreated as investors took profits. Large-cap tech stocks led losses. Regardless, the main indices posted a positive week.

You don’t have to be a scientific genius to see why Wall Street generally remains upbeat. Unemployment claims are falling, economic growth is robust, home prices are rising, and consumers are in a spending mood.

Meanwhile, the 2017 U.S. tax overhaul is the gift that keeps on giving. As the chart shows, the reduced domestic tax on repatriated foreign cash will bolster corporate financial strength:

Source: Bank of America Merrill Lynch

Corporate profits are as strong as they’ve been since the end of World War II.

For the third quarter of 2018, the consensus estimates for year-over-year earnings growth for the S&P 500 is 19.9%, according to research firm FactSet. If 19.9% turns out to be the actual growth rate for the quarter, it will mark the third highest earnings growth since the third quarter of 2010, when it came in at 34.1%.

Second-quarter earnings growth came in at a healthy 24.9%, with 80.3% of S&P 500 firms reporting earnings above analyst expectations. All of the 11 sectors in the S&P 500 index posted an improvement in earnings relative to the same quarter a year ago.

Energy in the lead…

The energy sector racked up the highest earnings growth rate in the second quarter (123.1%) of any sector. Energy-related firms earned $18 billion in the second quarter this year, compared to earnings of $8.1 billion in the same year-ago quarter.

Oil prices have increased from about $50 per barrel last September to more than $70/bbl today. U.S. benchmark West Texas Intermediate rose 0.82% Friday to close at $70.90/bbl. International benchmark Brent North Sea crude stayed flat to close at $78.22/bbl.

For the third quarter of 2018, the energy sector has the highest projected earnings growth rate (98.5%) of any sector. It is expected to earn $20.7 billion in 18Q3, compared to earnings of $10.4 billion in 17Q3.

OPEC production cuts and supply disruptions among major oil producers are bullish factors for crude prices. It’s another auspicious sign that energy companies are finally getting a handle on the massive debt that they racked up during oil’s halcyon days leading up to the 2014 price crash.

According to the latest EIA data, global energy companies in the second quarter reduced their debt for the seventh consecutive quarter, slashing their long-term debt-to-equity ratios to the lowest since the third quarter of 2014, when oil prices started heading south.

Oil prices and stocks have been moving in tandem, as traders perceive higher crude as a bullish indicator. These tailwinds are overpowering whatever qualms Wall Street may harbor about the tit-for-tat trade war. For now, at least.

What goes up…

We’re enjoying the longest bull market in history. There’s a natural allure to “up” markets, but be forewarned. The intoxicating effects of a bull market are not related to an investor’s need to have money rationally invested and allocated according to specific goals.

An underlying source of investor anxiety is the Federal Reserve, which has indicated that it will raise rates when it meets next week. When the Fed increases interest rates and squeezes credit, it causes money supply growth to nosedive, an unmistakable warning that a bull market will soon die.

Historically, money supply growth has exhibited a close correlation with stock price movements. An increasing money supply boosts stocks; decreasing money supply puts the brakes on stocks.

The self-defeating trade war is another source of worry. Since the White House began imposing tariffs on China, we’ve seen no sign that these tariffs will deliver on Trump’s signature campaign promise: bringing jobs back to America.

On the contrary, the tariffs will result in lost U.S. jobs, as well as higher inflation, diminished corporate profits, and slower global economic growth.

A final note about Isaac Newton (pictured above). The great physicist was a lousy investor. He lost £20,000, which represents more than $3 million in today’s money, when England’s hottest stock, the South Sea Company, crashed in 1720. The man who discovered gravity apparently forgot his third law of motion: what goes up must come down.

Friday Market Wrap

• DJIA: 26,743.50 +86.52 (0.32%)
  
• S&P 500: 2,929.67 -1.08 (0.04%)
  
• Nasdaq: 7,986.96 -41.28 (0.51%)
  

Friday’s Big Gainers

• Farfetch (NYSE: FTCH) +42.25%

Online apparel firm launches successful IPO.

• Steelcase (NYSE: SCS) +17.96%

Furniture maker beats on earnings.

• Puxin (NYSE: NEW) 9.51%

Analysts turn bullish on education provider.

Friday’s Big Decliners

• Tilray (NSDQ: TLRY) -30.25%

Congress questions medical cannabis firm’s importation of weed.

• Revlon (NYSE: REV) -12.19%

Insider dumps big block of beauty firm’s stock.

• United Natural Foods (NSDQ: UNFI) -8.51%

Food distributor misses on earnings.

Letters to the Editor

“What’s a safe way to bet on rising oil prices?” — Scott B.

Individual oil company stocks tend to move in sync with energy prices, but not always. They can be hampered by many factors such as bad mergers and ugly balance sheets. Energy-linked funds are better bets for more conservative investors.

Questions or feedback? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.