by Bob Stokes
Updated: April 19, 2018
A long-held assumption on Wall Street is that earnings drive stock prices: Good earnings mean prices rise; disappointing earnings mean prices fall.
Sounds logical, but is that assumption based on sound evidence?
Consider this chart and commentary from the December 2009 Elliott Wave Financial Forecast:
...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. The trends in earnings and stock prices sometimes even move in opposite directions, such as in the 1973-74 bear market when S&P earnings rose every quarter as the S&P declined 50%. More recently, earnings have been cycling with stocks, but that still leaves the problem of reporting delays, which leave investors eating the market's dust when the trend changes.
Despite facts like these, market pundits still like to speculate about the effect of earnings on stocks.
For example, an April 16 CNBC headline asked:
Will earnings extend the bull market?
Interestingly, just three days before, another CNBC headline and subheadline said (April 13):
Dow drops 200 points as JP Morgan falls 3.5%
... J.P. Morgan Chase reported quarterly earnings and revenue that surpassed analyst expectations.
Then, on April 17, a Business Insider headline had the same kind of message, just with a different company:
IBM down more than 5% despite delivering a beat in quarterly earnings
Truth is, it's a myth that corporate earnings consistently drive price patterns.
But this false assumption about earnings and stocks is by no means the only market myth. There are many more.
Investors like you need to be familiar with all of them so you can avoid market missteps that could do serious damage to your portfolio. In our publications, we strive to dispel common myths and show you the true market drivers.
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