Strong Earnings Should Keep Stocks on a Winning Path

From ‘buy low, sell high’ to ‘bulls make money, bears make money, pigs get slaughtered,’ Wall Street’s favorite maxims are as famous as some of the traders who live by them. You might be familiar with mine: As go earnings, so go stocks. 

And right now, earnings are really good. 

The more money a business makes, the more valuable it becomes; and of course, the reverse is also true. 

On Wall Street, this cash flow is measured in quarterly earnings, accounting for the business’ revenues minus all expenses and taxes. Therefore, it makes sense that as earnings go up, a company’s stock price – its real-time value – does, too. 

But this is more than theory. It is what tends to happen on Wall Street. 

Just look at the chart below. It reflects the S&P 500’s price (white line) with its earnings (blue line) from the early 1990s to today. As you can see, the two lines are nearly in lockstep with each other.

When earnings are rising – as they did from the early 1990s to 2000, 2003 to 2007, 2009 to 2014, 2016 to 2019, 2021 to 2022, and 2023 to today – stocks rise, too. When they’re falling – as they did from 2000 to 2002, 2007 to 2009, 2014 to 2016, and in 2020 and ‘22 – stocks do the same. 

As go earnings, so go stocks. That’s why we say, follow the earnings.

Right now, strong earnings are forecasting great things ahead for stocks. 

Earnings Recap

Over the past few weeks, companies across America have been reporting fourth-quarter earnings results. So far, those numbers have been very strong. 

About 80% of companies in the S&P 500 have reported earnings so far this season. More than 75% have beaten Wall Street’s profit estimates, meaning they made more money last quarter than analysts expected. 

Meanwhile, the blended earnings growth rate is nearly 17%, which marks the index’s highest profit growth rate since 2021.

This has been an absolutely fantastic earnings season. 

More importantly, trends are expected to stay strong for the foreseeable future. 

That is, next quarter, earnings are projected to rise about 8%, then another 9% in Q2. They are expected to rise almost 15% in the third quarter and about 13% in the fourth.

In other words, earnings should keep rising for the rest of the year. 

That means that if you’re hoping to lock in big market profits this year, now is the time to buy – before stocks continue powering higher.