This counterintuitive chart defines the stock market
There's nothing more important to stock prices than earnings and expectations for earnings growth. Earnings, or net income, is literally the bottom line.
While that's a principle that plays out in the market in the long-run, it unfortunately isn't promised in the short-run.
Take this chart FactSet's John Butters updates regularly. It shows the trajectory of the S&P 500 with the trajectory of analysts' forecast for next-quarter earnings. Prices have been going up even as analysts' forecasts have been coming down.
"During the month of July, analysts lowered earnings estimates for companies in the S&P 500 for the third quarter," Butters noted on Friday. "The Q3 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 1.5% (to $29.58 from $30.03) during the month."
FactSet
This is actually a trend we've been keeping track of for years. In fact, according to Morgan Stanley's Adam Parker, the trend in earnings revisions have been negative since 1976.
So, what gives?
First of all it's important to note that these are expectations that are getting revised down, which suggests analysts just have a tendency to be a little too optimistic.
Secondly, it's a reminder that the direction of earnings and expectations for earnings alone reveal very little about where stock prices are headed in the near-term. (Read more about this here and here.) Earnings and price often separate and it manifests in expanding and contracting valuation ratios.
Stock market bears may be correct that analysts are too optimistic. But that doesn't mean prices are doomed to fall any time soon. Studies show that the relationship between stocks and earnings become more sensible and predictable when you lengthen the time horizons. But for now, "The market can remain irrational longer than you can remain solvent."
- US buys 81 Soviet-era combat aircraft from Russia's ally costing on average less than $20,000 each, report says
- 2 states where home prices are falling because there are too many houses and not enough buyers
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- Nainital bucket list: 9 experiences you can't miss in 2024
- India Inc marks slowest quarterly revenue growth in January-March 2024: Crisil
- Nothing Phone (2a) India-exclusive Blue Edition launched starting at ₹19,999
- SC refuses to plea seeking postponement of CA exams scheduled in May
- 10 exciting weekend getaways from Delhi within 300 km in 2024
- JNK India IPO allotment date
- JioCinema New Plans
- Realme Narzo 70 Launched
- Apple Let Loose event
- Elon Musk Apology
- RIL cash flows
- Charlie Munger
- Feedbank IPO allotment
- Tata IPO allotment
- Most generous retirement plans
- Broadcom lays off
- Cibil Score vs Cibil Report
- Birla and Bajaj in top Richest
- Nestle Sept 2023 report
- India Equity Market