Why stock market can go higher?

Four and a half years and still going strong. The bull market that began in late 2002 is far from over. Pessimists will tell you that the good times have to stop, that after four years the market just has to be due for a correction. But that's because the pessimists don't look at what is driving this market.

The driver is the relationship between earnings yield (the inverse of a price/earnings ratio) and bond yields. When earnings yields are bigger than bond yields, institutional investors can make a profit by using borrowed money to acquire shares of stock. The process can continue for years, until equity prices are bid higher or the cost of money gets higher.

We're in the middle of such a process. The phenomenon can go on for quite a while. It did in the early 1960s, when a combination of cheap money and low stock prices gave rise to the conglomerate boom, personified by Harold Geneen of ITT.

Who are today's institutional buyers? They are of three kinds. Some are private equity investors, firms like KKR and Blackstone that use mostly borrowed cash to buy whole companies outright, even, as we are now witnessing, a giant electric utility. Next are publicly traded corporations using debt (or a combination of debt and other financing) to acquire competitors or related firms; an example is Tata Steel's deal to buy British steelmaker Corus (nyse: CGA - news - people ), announced Jan. 31. In the lingo of analysts, the deal will be accretive. That is, Tata's earnings per share will go up as a result.