Chart of the Month (September 2023)
Chart Description
- This chart shows the growth rate for S&P 500 earnings on a 12-month trailing basis.
- Many investors view the S&P 500 as a proxy for the US Stock Market, and therefore earnings growth for the S&P 500 is viewed as a general gauge of economic health.
- While volatile, earnings growth has averaged 7.8% for the last 40 years.
- Earnings typically turn negative during an economic recession as seen in 1990, 2000-2002, 2007-2009 and March 2020.
- Despite falling 13% in calendar year 2020, S&P Earnings growth outperformed the long-term average throughout the pandemic, producing a 10.5% annualized growth rate from 2019-2022.
- The latest reading, as of September 12, 2023, shows earnings have declined 1% on a TTM basis.
Our Take
Having a firm grasp on company earnings is critically important for investors. It conveys where stock prices have been and more importantly where they may be headed. While prognosticators offer countless explanations for daily gyrations in the stock market, it seems clear over the long run that stock prices follow earnings. If earnings increase, stocks typically gain value. If earnings decline stocks are likely to follow.
If it is true that stock prices follow earnings, one might ask why the S&P 500 has performed so well YTD with overall earnings declining in recent quarters. The answer, in our view, is that markets are forward-looking. It is not what has happened, but rather what market participants think WILL happen that drives current prices. If our view is correct, then the recent performance of the S&P 500 makes much more sense. Anecdotally, market participants seem to be optimistic that the US Economy will avoid a steep recession and that the Federal Reserve has conquered inflation. That optimism has permeated into Wall Street analysts’ estimates for S&P earnings in 2024 and 2025. Based on current estimates, analysts are projecting earnings growth of roughly 12% in each of the next two years, which is over 50% (12/7.8) greater than the average earnings growth for the last 40 years. That seems generous to us given the impact of inflationary cost pressures on consumers, tightening bank credit and an exploding fiscal deficit.
The legendary investor, John Templeton, was quoted as saying, “it is impossible to produce superior performance unless you do something different than the majority.” Instead of trying to come up with our own forecast of what the S&P earnings are likely to be in the coming years, we find it more productive to simply listen, read and absorb what the majority opinion seems to be at this moment. We can then filter the consensus view through our own experience, education and knowledge of financial history to determine whether it seems reasonable. With regard to earnings growth of 150% of the long-term average, we have our doubts.
JPS Financial, LLC is registered as an investment adviser with the SEC. All information is believed to be current and should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. All investments and strategies have the potential for profit or loss.
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