NEW YORK (TheStreet) -- The business of companies gobbling each other up or merging is roaring.
It's not just good news for Wall Street's dealmakers at Goldman Sachs (GS - Get Report) and Morgan Stanley (MS - Get Report), it's good news for stock market investors as well. Even better news: There are reasons to think the mergers and acquisitions trend will continue.
Deal volume among U.S. companies totaled approximately $1.2 trillion dollars this year through early July, according to the latest figures from Dealogic, which tracks the data. That's up 36% from the first seven months of last year, even though July isn't yet half over.
That alone should be good for stocks. Although the deals business can be bumpy, clear trends emerge. You can see from the first chart that stocks, as measured by the S&P 500, go higher when there are more deals. They go lower when deals are absent. There are other factors in the index movements, too, but the correlation is undeniable.
If you doubt that consider this: Takeover offers get made at a premium to current prices; otherwise, they wouldn't get approved. Hence, more deals push stock prices higher.
The great news is that we have seen a lot more deals over the past few years, as the second chart shows. Part of that surge is clearly that the low cost of borrowing money, thanks to the Fed keeping interest rates around zero, provides a cheap source of funding. But it's not the only part of the story.
"Organic top line growth is missing from business," says Dan Veru, chief investment officer of Fort Lee, N.J.-based Palisade Capital Management. Or put another way, revenue at many companies is not exactly growing fast.
Annual sales growth for the S&P 500 has barely broken through the 5% mark since early 2012, a sharp contrast to the prior decade when it was much higher, according to Ed Yardeni of Yardeni Research. That finding fits with the sluggish growth in the U.S. economy lately.
The lack of revenue growth means a couple of things. First, if companies want to grow the size of their business and can't do it with existing operations, then they need to buy other companies.
Second: when companies aren't investing internally, they're often generating lots of capital that can be put to use buying other companies, says Veru.
That favorable trend will likely continue in an "M&A Supercycle," or long-term bull market for deals, he says. Veru knows about deals: He worked for junk-bond king Michael Milken at Drexel Burnham Lambert back in the 1980s.
Even two years ago, he foresaw good things for the deals business. "The death of the M&A cycle has been greatly exaggerated," he wrote in a research report dated July 2103.
Given that few are expecting the U.S. economy to surge, deals, along with stock buybacks, may be one of the few ways for companies to boost their share prices. An improving M&A cycle should be a good bet for stocks in general, such as those in the SPDR S&P 500 exchange-traded fund (SPY - Get Report).
But there are more targeted ways to profit. Pallisade's Veru says he likes Lazard (LAZ - Get Report), which not only has a strong deal-making arm, but also an asset management business that provides some stability to earnings.