I was curious to see how the stock market performs when earnings are growing and when earnings are shrinking.
I looked at Robert Shiller’s data which goes back to 1871. I found that there were 969 months when earnings grew from one year ago, 658 months when earnings fell and 46 when earnings stayed the same. That works out to 58% of the time with expanding earnings, 39% with falling earnings and 3% when earnings stayed the same.
Combined, the 969 months of growing earnings combined for a market advance of more than 32,000%. Annualized, that works out to 7.44%.
For the unchanged earnings, the market rose by an annualized rate of 5.69%.
For the 658 months when earnings fell from one year before, the market combined for a loss of nearly 40%. That works out to a loss of 0.92% on an annualized basis.
The takeaway is that the market’s performance is closely aligned with earnings growth. The difficulty is that you can’t always be sure what earnings are doing at the exact moment.
The other hitch is that Shiller’s data is a monthly interpolation of quarterly numbers. During this last cycle, earnings peaked in the second quarter of 2007 and bottomed in the first quarter of 2009.
The good news is that earnings are projected to continue growing.