Equity markets have now registered gains in each of the last four first quarters (January-March), extending a streak that began in 2010. Last quarter’s gain of 10.6% pushed the S&P 500 into record territory, surpassing levels it first reached in October 2007 – prior to the debt crisis and recession. This year has also started very well for investors who have embraced strong corporate fundamentals by owning the stocks of profitable and growing operating companies.

As was the case in 2012 – also a very good period for disciplined investors – plenty of distractions sought to undermine sound, fundamentally based investment strategies in the first quarter. In the past three months, investors might have been spooked by numerous events, including: mandatory sequester, Iranian-Israeli tensions, Cypriot bank failures, or threats from North Korea.

Markets usually climb a so-called “wall of worry,” and the current bull market is indicative of this phenomenon. Four years and nearly 9,000 Dow points from the lows of 2009, investors are still outwardly distrustful of the rally and utterly at a loss to offer a single plausible explanation for the market’s strength. Many are still on the sidelines awaiting the next correction or crash. And when asked what might trigger the next downturn, a litany of responses is immediately available. A supportive case can be made for the gains simply by looking the underlying profits of the actual companies. From the March 2009 lows, the S&P 500 has gained roughly 133%. Over the same time period, the aggregate profits of the companies that comprise the index have also increased 90%. Earnings for the S&P 500 are also more than 25% higher today than they were the last time index prices were at this level.

At this stage in the cycle, there are several key uncertainties that could determine whether the bull market continues or falters. First, will budding expansions in the housing and auto industries continue to build, or will momentum wane? Presently, there are powerful structural trends that suggest growth in both areas. Second, will interest rates rise in a manner that impedes the plodding expansion? At this point in the cycle, rates should be higher than they are today, and we believe rates will rise, but we acknowledge that the Fed is very aware of the markets’ sensitivity to rapid increases. Bernanke is committed to the removal of today’s excessively-accommodative policies in an orderly and telegraphed fashion. And finally, will taxes, the Affordable Healthcare Act, and/or Dodd Frank legislation stymie would-be growth initiatives of small, medium, and large businesses?  We hope not, but with fewer than a third of the rules written for Dodd Frank, for example, the ultimate impact is impossible to handicap. In this regard, the uncertainties surrounding fiscal and regulatory policy are more difficult to handicap than the trajectory of the economy and monetary policy. All of these factors will affect operating results, but Peloton is focused on identifying and investing in companies that can generate strong profit and cash flow growth in a range of political and economic climates.