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Earnings Drive Stock Prices? See This Chart Before You Answer
A free Club EWI report exposes the TEN most misleading myths of Wall Street, including this one: "Earnings drive the stock market."
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By Nico Isaac
Thu, 06 Jan 2011 15:45:00 ET |
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Since the time of buttonwood trees, Wall Street has had its own version of the Ten Commandments -- the cornerstone principles of conventional economic wisdom. The first of these writ-in-stone notions is the widespread belief that earnings drive the stock market.
By this line of reasoning, knowing where a market's prices will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. On this, the recent news items below capture the public's devoted following of earnings data:
- "Stocks Rebound As Investors Await Earnings." (Associated Press)
- "US Stocks Drop As Earnings Data Fall Short" (MarketWatch)
- "Sideways Market Looks For Direction: Earnings Could Point The Way" (MarketWatch)
In reality, though, much of this belief is based on faith, not facts. While earnings may play a role in the price of an individual stock, the stock market as a whole marches to a different drummer.
You get this ground-breaking revelation in the FREE report from Club Elliott Wave International (Club EWI, for short) titled "Market Myths Exposed." In Chapter One, our editors shatter the smoke-screen surrounding the widespread notion that "Earnings Drive Stock Prices" with these enlightening insights:
- "Quarterly earnings reports announce a company's achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes."
- And -- There is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Case in point: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period. Here, "Market Myths Exposed" provides the following, visual reinforcement: A chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.
As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the March 2009 bottom in stocks.
"Market Myths Exposed" dispels the top TEN fallacies of mainstream economic thought. The misconception that "Earnings Drive the Stock Market" is number one. The remaining nine are equally capable of knocking your socks off and most importantly, helping you protect your financial future.