Related Topics
Stocks , Investing
     

Earnings Season: Here's What Stock Investors Need to Know

by Bob Stokes
Updated: October 15, 2020

Many investors and financial journalists believe that corporate earnings play a large role in driving stock market prices.

Here's just a couple of headlines from Oct. 13:

  • Stocks open mixed on first day of earnings season (MarketWatch)
  • U.S. Stocks Drop as Earnings Season Begins (Wall Street Journal)

The idea that earnings drive stock market prices seems to make sense. After all, corporations exist to make money, and if they exceed expectations, it seems logical that their share prices should skyrocket. If earnings disappoint, logic suggests that stocks should tank. And, in all fairness, when it comes to individual companies' earnings, they can and do affect prices -- although not always, and not always logically. But when you compare broad market performance with trends in earnings, you start to see a glaring disconnect. Why?

Because investors are not governed by pure logic. They are governed by collective psychology – which swings from optimism to pessimism and back again, regardless of factors like GDP numbers, unemployment or -- yes, earnings.

Let's make the point by using a historical example from Robert Prechter's 2017 book, The Socionomic Theory of Finance. Here's a chart and commentary:

EarningsPrices

... in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the S&P suffered its largest decline since 1937-1942. This is not a small departure from the expected relationship; it is a history-making departure. ... Moreover, the S&P bottomed in early October 1974, and earnings per share then turned down for twelve straight months, just as the S&P turned up!

A more recent historical example is from the December 2009 Elliott Wave Financial Forecast.

YesterdaysNews

...quarterly earnings reports announce a company's achievements from the previous quarter. Trying to predict future stock price movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror.

You'll notice on the chart that in Q4 2008, the S&P 500 had its first negative earnings quarter ever. According to conventional logic, stocks should have crashed afterwards.

Instead, a rally started in March 2009, which stretched all the way into 2020.

If earnings and other factors outside of the market do not determine the trend of stock market prices, what does?

The answer is the Elliott wave model. Get important insights by reading our flagship Financial Forecast Service.

See the Financial Market "Trend Turning" Signals ...
... That Others Miss

Just a little digging into financial history will show you when a widely traded financial market is on the cusp of a major shift.

You see, certain patterns of financial history repeat themselves.

Why? Because investor psychology itself is patterned.

Here's the good news: Our Elliott wave experts have already done the "digging" for you. You merely scoop up this hard-won knowledge and use it for your benefit.

Follow the link below to learn what you need to know now about major U.S. financial markets, like stocks, bonds, gold, silver, the U.S. dollar and more.

EXCLUSIVE

German Stocks: “… on the brink of a very dramatic decline”

The strong recent decline in Germany's DAX has many investors worried -- after all, the DAX is Europe's equivalent of the DJIA. Now see how a simple Elliott wave price formation guideline -- first discovered by R.N. Elliott almost 100 years ago -- warned of the DAX's bearish opportunity as early as October 14. Our European Short Term Update editor explains.

What We See in the Stock Market

On Friday October 23rd, The Short Term Update noted the recent "lower lows and lower highs" - and told subscribers to keep an eye on 28,040 in the Dow, saying a break could come "very early next week." See the chart and forecast for yourself.

What This Survey Reveals About Investor Sentiment

Many retail and professional investors remain bullish on the stock market -- even after a multi-month rally. Get insights into a recent investor survey -- plus, see a chart which shows how the current optimism matches up with similar levels of optimism in the past.