Elliott Wave InternationalmyEWISocioniomics.Net
Home > Stocks
U.S. Stocks: What You Need to Know About Earnings Season
If earnings do not drive the market's trend, what does?
By Bob Stokes
Tue, 17 Apr 2012 15:30:00 ET
Add to Facebook Add to Twitter Email to a friend Printer Friendly Get the RSS feed Add to more social media services
Get investable insights sent to your inbox at least once a week – for free. Challenge the way you think about investing with The EWI Independent. Privacy

It's earnings season. And like they do every quarter, stock market observers want the answer to the ritual question: Will earnings drive stock prices higher or lower?
 
The premise that earnings drive stock prices is so ingrained that it's not a question of whether earnings steer stock prices, but how will earnings steer the indexes.
 
Here's what you need to know: There's no consistent correlation between S&P 500 earnings and the market's performance. Just take a look at the chart and then read the commentary:
 
 
  
[The belief that earnings drive stock prices] powers the bulk of the research on Wall Street. Countless analysts try to forecast corporate earnings so they can forecast stock prices. The exogenous-cause basis for this research is quite clear: Corporate earnings are the basis of the growth and the contraction of companies and dividends. Rising earnings indicate growing companies and imply rising dividends, and falling earnings suggest the opposite. Corporate growth rates and changes in dividend payout are the reasons investors buy and sell stocks. Therefore, if you can forecast earnings, you can forecast stock prices.

Suppose you were to be guaranteed that corporate earnings would rise strongly for the next six quarters straight. Reports of such improvement would constitute one powerful "information flow." So, should you buy stocks?
 
[The chart above] shows that in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the S&P suffered its largest decline since 1937-1942. This is not a small departure from the expected relationship; it is a history-making departure. Earnings soared, and stocks had their largest collapse for the entire period from 1938 through 2007, a 70-year span! 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! An investor 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.
 
In real life, no one knows what earnings will do, so no one would have made such bad decisions on the basis of foreknowledge. Unfortunately, the basis that investors did use -- and which is still popular today -- is worse: They buy and sell based on estimated earnings, which incorporate analysts' emotional biases, which are usually wrongly timed...this glaring an exception to the idea of a causal relationship between corporate earnings and stock prices challenges bedrock theory.
Elliott Wave Theorist, February 2010
 
If earnings do not drive the market's trend, what does?
 
Our study of stock market price history strongly suggests that the market is governed by the Elliott Wave Principle, which is independent of presumed causal events like earnings reports. 

You get instant access to EXCLUSIVE charts plus our one-of-a-kind analysis of stocks, bonds, gold, silver, the U.S. dollar, the euro, the economy and more

BONUS: You get complimentary copies of the second edition of Conquer the Crash AND the Wall Street classic Elliott Wave Principle

RISK-FREE for a full 30-days

ACT NOW while this LIMITED-TIME, 57% SAVINGS OPPORTUNITY is still available>>

 

 

 

Tags: earnings, Elliott wave, fundamental analysis, market forecasts, S&P 500, stock indexes
Rating: - based on [7 rating(s)]
Rate this content:
  
 
EWI's Event Calendar
May 13-16     

Las Vegas Money Show
July 10-13       

Freedom Fest Conference


Stay Ahead of the Trend in U.S. Stocks

FFSEWI's Financial Forecast Service equips you to think, trade and invest independently from the crowd. Here's what you'll get, risk-free:
  • Short Term Update -- Intensive forecasts and analysis 3x/week for U.S. stocks, gold, silver, bonds and the U.S. dollar.
  • Financial Forecast -- In-depth, intermediate-term perspective on U.S. stocks, gold, silver, bonds and the U.S. dollar.
  • Theorist -- Bob Prechter's monthly big-picture insights.
Put the Financial Forecast Service on your screen in minutes, risk-free>>

Most ReadHighest Rated
Free Video Course
Learn the Why, What and How of Elliott Wave Analysis

Financial media use news and economic events to explain market moves. Steer clear of this misguided approach. Take part in the Elliott Wave Crash Course to learn what really moves the markets.


© 2013 Elliott Wave International

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.