On any given day, a headline—or even a tweet—can move the stock market. And sometimes those moves are extreme. But what really drives stock prices over the long-term?  Spoiler alert: Earnings matter.

In this episode we discuss:

  • Do Presidential tweets move the market?
  • There is a lot of noise, but over time, profits drive the market.
  • There is a strong correlation between stock prices and earnings.
  • Business in America is good.

Video: Earnings Matter

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Tweets Moving The Markets

If you haven’t heard, our current president likes to tweet. A lot. Since 2016 the president has tweeted over 10,000 times. About 10% of those tweets are about something important to the financial world.

Some of the big firms try to track the impact of the tweets on the markets. JP Morgan found his musings have had a significant impact on the bond markets. And Merrill Lynch discovered his twitter activity has had a modest impact on the stock market.

But does it really move the needle on stock prices over the long term?

Earnings Matter

The real driver of stock prices and returns extends beyond headlines and tweets. In fact, that stuff is mostly just noise. Sure, it has a short-term impact. But over longer periods of time, people forget those things.

The real driver of prices and returns are corporate profits. When you buy stocks you are buying the future earnings of those companies. When earnings increase over time, the prices tend to follow. And when earnings decrease, you see the impact on stock prices.

In other words, earnings matter a lot.

Consider this:

  • Over the past 30 years, stock prices have increased 7.7% per year. And that doesn’t include the return from dividends. Corporate profits have increased 5.7%.
  • Over the past 20 years, prices have increased 3.8%, profits 6.3%.
  • In the last decade, prices are up 12%, earnings are up 34%.
  • And in the last five years, prices are up 8.5% and profits are up 5.75%.

If you look at a graph of stock prices and corporate profits, they tend to follow a very similar path.

(Click On the Images To Enlarge)

30 Years
Corporate Earnings Matter
10 Years
Corporate Earnings
20 Years
Earnings matter
5 years

So why is this important to talk about now?

There has been a lot of noise lately. We have a trade war, talk of a recession, an election and political bickering. But what tends to get lost in the shuffle is how American businesses are really doing.

According to Standard and Poors, 498 of the 505 companies in the S&P 500 have reported earnings for the second quarter. Nearly three quarters of those who have reported earnings have beaten their estimates. Only 17% reported lower earnings than expected. The “misses” are well below average for the past several years.

Click To Enlarge

Things Can Change (Without Notice)

Right now, the earnings news has been quite good.  But that may not always be the case. Profits go in cycles just like the economy.  There will be another period where earnings contract.  In fact, we are starting to see some predictions for a decrease in profits. 

Whether the contraction happens or not remains to be seen.  But that is the nature of the investment world.  We don’t know, in advance, what these outcomes will be.  And that adds to the challenges we face.

The financial world can be a noisy place. It is difficult to sort through what matters and what doesn’t. In our experience, earnings matter.  And like most things in the investment world, the future is very unpredictable.

Stay Informed.

Monday Morning Money is a podcast talking about current events which  impact your bottom line.  

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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