The stock market closed at a new record high on Thursday. The main reason for this rally is seen in the chart below. It shows year over year quarterly operating earnings growth since 1995. The mini-decline in earnings growth in 2015 and 2016 is like the one in 1998.

Earnings growth had been sinking prior to both periods as 1998 and 2016 were both years in which the recovery had been getting old. Instead of falling into a normal recession, earnings declined and rebounded for one final hurrah. If this earnings recovery acts in concert with the one in the late 1990s, we have four more quarters of growth. The stock market is certainly acting similarly as then as there was a 45 day 19.3% correction in 1998 before it flew higher and had a blowoff top. There was a 12.4% correction in 2015 and a 13.3% correction in 2015 and 2016. Since then, stocks have flown higher. Keep in mind the chart is slightly manipulated in 2008 and 2009 because the extreme values would cloud the movement in the other years.

As I have mentioned previously, the earnings growth has been driven mostly by margin growth, not revenue growth. As you can see from the chart below, the revenue growth in Q1 2017 is not as impressive as the growth seen in 1998. Technically it doesn’t matter to investors whether revenue growth or margin growth drives profits. The problem is that margin growth reverts to the mean. Investors are seeing profit growth and ignoring the possibility that margin growth is less sustainable than revenue growth. They won’t care until margins dip.

The new theory on Wall Street is that margins have reached a plateau and may even break new records because firms are more efficient than ever. There’s certainly an allure to how well Google and Facebook are doing, but this thesis doesn’t stand up to intellectual rigor.

As you can see from the chart below, the return on incremental capital for S&P 500 firms has been negative for the past few quarters. No wonder why firms aren’t investing in capex. If firms were profit machines spewing out everlasting profits with more investment, they wouldn’t be plowing money into buybacks and dividends.