Stocks: Let’s Challenge This Belief About Corporate Earnings

In his ground-breaking book, the Socionomic Theory of Finance, Robert Prechter reveals 13 market myths which harm investors.

Most investors accept these ideas as truths, but they fool investors into making bad decisions. You can read them all for free by following the link below.

But I want to show you one of these myths, which has to do with corporate earnings.

Many market observers believe that those earnings drive the stock market, so we often have headlines like this:

Main Indexes Soar Higher on Strong Corporate Earnings

Or —

Dow Industrials Tumble Triple-Digits on Disappointing Earnings

Yes, sometimes the stock market happens to rise on days when there’s a slew of positive corporate earnings reports and vice versa. But what many investors forget is that there are other trading days when earnings reports are good and stocks fall and rise when earnings disappoint.

As Robert Prechter notes in the Socionomic Theory of Finance:

The belief that corporate earnings drive stock prices has long powered a vast bulk of research on Wall Street.

Suppose you knew that corporate earnings would rise strongly for the next six quarters straight. Would you buy stocks?

Robert Prechter continues his commentary as he shows this chart and says:

[The chart] shows that in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the same companies’ stock prices suffered their largest collapse since 1937-1942. … 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 speculator with foreknowledge of these earnings trends would have made two perfectly incorrect decisions, buying near the top of the market and selling at the bottom.

This is only one of the 13 market myths that you will find as you access Chapters 1 and 2 of the Socionomic Theory of Finance for free by following the link below.