Why are Corporate Earnings so Important?

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Clues to The Market's Next Move

S&P 500 Earnings Growth is Picking Up Steam...

Earnings & Revenue Growth for The S&P 500 Are Anemic...

The Richest 10% of Americans: What They Make & What They're Worth...

What The Richest 10% of Americans Make... 

 The average income of the richest 10% of Americans fell         -5.3% from 2007 to 2010, dropping from $216,800 to $205,300. 

What The Richest 10% of Americans Are Worth...

The average net worth of the richest 10% of Americans increased +1.9% from 2007 to 2010, rising from $1.172 million to $1.194 million. 

Source: Federal Reserve

Earnings Growth In A Steady Decline Despite Stock Market Rally...

Wages (Adjusted for Inflation) Declining Again...

Corporate Earnings Guidance is Not Yet Recessionary...

Corporations posted operating earnings growth of 12% in the second quarter, despite meager U.S. economic results.

Slowing global economic activity will undoubtedly take an even greater toll on profits during the second half of 2011, but profit growth is far from recessionary territory. And corporations have proven adept at maintaining profitability in a weak economic climate.

Although corporate earnings guidance deteriorated dramatically in July, negative guidance remains far below levels previously associated with negative profit growth in outright earnings recessions.

Valuations Hit 26-Year Low As Profits Surge And Stocks Languish

Companies in the S&P 500 Index will earn +18% more in 2011 than in 2010, according to a survey of 9,000 analysts, BUT stock prices are NOT reflecting that rate of growth. The S&P 500 has corrected since April 29 on concerns over China’s slowing economy, the potential Greek default and the end of the Federal Reserve’s $600 billion stimulus program.  Negative reports on housing, employment and manufacturing have also sent some investors to the sidelines. As a result, even if companies posted no growth in 2011, price-earnings ratios would be lower than on 96% of days in the past two decades, according to a Bloomberg analysis.

Average Hourly Earnings on A Flat to Downward Trajectory...

Is this graph is indicative of economic prosperity?

Not for the purchasing power of the average consumer.

S&P 500 Earnings Rise Sharply In The Past Year...

The aggregate annual earnings of the S&P 500 companies are +38% higher today than they were just 1 year ago (source: S&P). 

Bodes well for the economy and the stock market.

4th Quarter Corporate Earnings: Strong Results...

The health of corporate earnings has more to do with the movement of stock prices than any other measure.

And we just came through another strong earnings season for the S&P 500 as evidenced by the following...

3.42 stocks had a positive surprise for every 1 that was negative.  

1.88 positive estimate revisions ratio. Means that earnings estimates are moving up for the future.

Year over year growth of +43.7%.

Strong earnings that beat expectations and were revised upward are the major reasons why stock have performed so well in the past 3 months.

Strong Earnings Growth Doesn't Typically Foreshadow Significant Market Rallies

One reason why the current earnings season has not done much to push prices higher is from an historical standpoint, stock returns tend to peter out when earnings soar.

Contrary to conventional wisdom, Ned Davis Research shows that when year-over-year changes in the S&P 500 earnings are +20% or higher, the market gains just +1.5% per year.

However, when 12-month earnings growth has been between 
-10% and -25%, stocks have soared at more than +26% per year.

Chart of The Day - S&P 500 Earnings Soar +700% from Q1 2009

Chart & Analysis Courtesy of ChartOfTheDay.com

With first-quarter earnings basically in the books (99% of S&P 500 companies have reported for Q1 2010), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings.

Today's chart illustrates how earnings declined over -92% from its Q3 2007 peak to Q1 2009 low -- the largest decline on record (the data goes back to 1936).

Since its Q1 2009 low, S&P 500 earnings have surged (up over 700%) and currently come in at a level that has only been exceeded during the latter years of the dot-com and credit bubbles.

Chart of The Day - S&P 500 Earnings (Inflation-Adjusted)

Chart Courtesy of ChartofTheDay.com

With 4th-quarter earnings largely in the books (over 79% of S&P 500 companies have reported for Q4 2009), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported, S&P 500 earnings.

Today's chart illustrates how earnings declined over -92% from its Q3 2007 peak to Q1 2009 low -- the largest decline on record (the data goes back to 1936).

Since its Q1 2009 low, S&P 500 earnings have surged (up over 600%) and currently come in at a level that has only been exceeded during the latter years of the dot-com and credit bubbles.