It’s Now Really All About Earnings


Below is a graph of two data series going back thirty years.

The first series in blue is the S&P 500 Index level valued on the left-hand axis. The second series in orange is the S&P 500 Index earnings valued on the right-hand axis. The relationship between stock prices and their earnings is well established and evident in the graph.

Overall, we can see throughout this history stock prices tend to be out in front of earnings, moving higher in advance of higher earnings being delivered. This makes sense as stock prices tend to be driven by anticipation of future events.

Now focus on the right side of the graph. We can see that stock prices moved down in advance of the earnings declines experienced in 2022. And, importantly, we can see that in 2023 the stock market has advanced even while earnings are flat.

From this, we could infer that the stock market is anticipating a return to earnings growth soon.



It is against this backdrop that we are entering the second quarter earnings reporting season which will pick up intensity soon.

This week, about 800 companies will report earnings. In the three weeks that follow, an additional 5,000 companies will report earnings.

By early August, we should have a very good idea of whether the stock market correctly called an earnings recovery or whether the market got a little ahead of itself.




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