During the Internet Bubble, one warning sign it would pop was the book “Dow 36,000.” Today it’s Morgan Stanley predicting the Standard & Poor’s 500-stock index will hit 3,000 in the next five years – that would be a 50% gain from the S&P’s current level.

Both are predictions of radical new highs when the market is already pushing its limits. Morgan Stanley economists based their forecast on earnings growth of 6% a year and a S&P 500 price/earnings ratio of about 17, according to new report titled “2020 Vision: Long Live the Expansion.”  

Given some big companies are growing earnings greater than 5% that might seem possible at first glance.  But the growth is based on Federal Reserve stimulus (which is being cut back) and stock buybacks (which are being cut back).

What is generally driving the earnings growth, according to investment bank Societe Generale, isn’t improvements in cash flow. The bank found one-time gains such as write downs, assets sales and restructuring charges were often responsible. In a report, the bankers echo a concern shared by many that income gains come from cutting expenses rather than investing in new business.

Another concern comes from University of Massachusetts professor William Lazonick in a recently published paper in the Harvard Business Review titled, “Prosperity without Profits.”Lazonick found profits were spent on stock buybacks and dividends instead of investing in new business.

His study showed that from 2003 through 2012 companies in the S&P 500 used 54% of their earnings—$2.4 trillion—to buy back their own stock, Dividends accounted for another 37% of their earnings. That left “very little” for improving productivity or paying employees more, he wrote.

Meanwhile, some asset managers are betting against the market. According to Bloomberg, Oaktree Capital Group, the world’s biggest distressed-debt investor, is seeking $10 billion for a new fund with plans to sit on most of the money until rising markets reverse course. An Oak Capital manager told Bloomberg that the combination of a drop in credit standards and the record in new junk bonds means more of the distressed debt they feed on is coming.

Demographics is Destiny

I’d love to see five more years of expansion, but I’m not betting on it – except when it comes to certain global companies, such as the ones we’ve selected for the Global Income Edge portfolios.

Global companies tap emerging markets, and emerging markets are where the growth will be. The new book by economist Thomas Piketty, entitled “Capital in the 21^st Century,” says that from 1900 to 1980, 70% to 80% of the global production of goods and services were concentrated in Europe and America. By 2010, the European-American share had declined to 50%, or about the same level of 1860. He writes this share will probably “continue to fall and may go as low as 20% to 30% at some point in the twenty first century.”

Piketty isn’t the only one that has been focusing on these issues. In its recent World View paper, J.P Morgan Asset Management finds that the, “The U.S. economy is likely to grow at a rate closer to 2% instead of its long-term average of 3% in part because fewer workers are entering the workforce. Most developing countries don’t have that problem.

So while the growth of developed economies in general, and the U.S.’s in particular, is debatable, the growth of developing markets isn’t. And that means a smart global investment strategy that safely taps developing markets is in order.

Portfolio

A company that clearly capitalizes on this strategy is Alliance Bernstein (NYSE: AB), a U.S.-based, global asset management firm. It will profit from selling its mutual funds and delivering financial advice to growing populations of middle class consumers in emerging markets. Most of the assets it manages come from the U.S., but more than a third come from various countries around the world.

The firm is one of the top asset managers internationally. It sells its mutual funds to retail investors, and manages money for institutions ranging from pension funds to endowments. About 34% of the assets it manages are from the general public and 50% come from institutions. The rest come from private clients.

Alliance Bernstein, which is in our Aggressive Portfolio, had a great second quarter – its best quarter since 2007’s fourth quarter. It increased its assets under management 6% from the first quarter, and 11% from the same quarter last year.

More assets under management mean higher revenues and profits, as companies such as Alliance Bernstein collect a fraction of those assets in fees.  Revenues were 4% higher for the second quarter than the same quarter last year, though profits inched up only slightly.

However, the company has plenty of cash and can afford its 6.61% dividend yield.

Alliance Bernstein is a Buy up to $30.