Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Study: Does the year-over-year change in Corporate Earnings Lead the Stock Market?

Stock-Markets / Stock Markets 2018 May 08, 2018 - 03:51 PM GMT

By: Troy_Bombardia

Stock-Markets

I concluded that the absolute value of corporate earnings does not consistently lead the stock market in a previous study. I.e. sometimes corporate earnings fall before the stock market falls, sometimes the stock market falls before corporate earnings fall.

But what about the rate of change in corporate earnings? Does the change in corporate earnings GROWTH (i.e. second derivative of corporate earnings) lead the stock market? It appears to be the case from 1990-present.


Let’s find out.

*You can download the data here in Excel

Does the year-over-year change in earnings lead the stock market?

This chart demonstrates the year-over-year change in the S&P 500’s corporate earnings (updated each month).

  1. A value of “1” means that earnings haven’t changed from this month vs. 1 year ago.
  2. A value > “1” means that earnings have grown from this month vs. 1 year ago.
  3. A value < “1”, means that earnings have fallen from this month vs. 1 year ago.

As you can see, this is NOT a good leading indicator for the stock market.

  1. Sometimes the year-over-year change in earnings leads the stock market. Sometimes it lags the stock market.
  2. The year-over-year change in earnings gives false signals.

For example, the year-over-year change in earnings turned negative in August 2012 and remained negative until April 2013. The stock market went up during this period (although there was a “small correction” along the way).

Here’s another example. The year-over-year change in earnings turned negative in April 1985 and remained negative until August 1987. The stock market went up while earnings growth was negative. When earnings growth started to rise and turned positive, the stock market CRASHED (“significant correction” of 1985).

 

What about the year-over-year change in inflation-adjusted earnings? Does that lead the stock market?

Does the year-over-year change in inflation-adjusted earnings lead the stock market?

This chart demonstrates the year-over-year change in the S&P 500’s inflation-adjusted earnings (updated each month).

  1. A value of “1” means that earnings haven’t changed from this month vs. 1 year ago.
  2. A value > “1” means that earnings have grown from this month vs. 1 year ago.
  3. A value < “1”, means that earnings have fallen from this month vs. 1 year ago.

As you can see, this is even more useless as a leading indicator for the stock market. The year-over-year change in inflation-adjusted earnings frequently went down and turned negative when the stock market rallied.

In other words, this indicator is very choppy and gives a lot of false bearish signals.

Conclusion

It seems like the stock market cares more about whether earnings are increasing or decreasing than whether earnings GROWTH is increasing or decreasing.

But more importantly, it seems that corporate earnings indicators are not as useful as economic indicators for predicting the stock market’s medium-long term direction. This is why I don’t use earnings data in the Medium-Long Term Model.

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in