What’s Going on with Earnings and Stock Prices?

I was reading yet another Seeking Alpha article (by Eric Parnell) commenting on the earnings recession, and decided to see what the data says about earnings recessions.  So I pop into Equities Lab and see how earnings have looked since 2014.

Well!  If I believe that chart, earnings are so smooth, they don’t need predicting.  They just go down!  Let’s zoom out, and see if that’s just the face of new American business.

Nope.  Earnings go up, and they go down.  Ax explanation of the lines is in order:  The brown line is the S&P 500.  The green line is the performance of an essentially mindless strategy that buys all companies (equally weighted) that have a market capitalization over one billion dollars.  The pink line is simply the sum of all the net income of all of those companies.  It looks like those lines correlate — except when they don’t.  If we plot the correlation, maybe we can tease out some details that will help us react more sensibly in this odd market environment.

Notice the correlation between the green line and the pink line (as shown by the blue line — the 252 day rolling correlation) is pretty good, except recently.  It looks line earnings are rolling over, while the stock market is failing to crash.  I’m not sure I’d use the words “up, up and away”, but some people would. Usually the purple line is late, and starts going up (or down) after the market does, but here that’s clearly not the case.  I’m going to plot the revenue line, to see if that paints a more hopeful tale.

No joy here — if anything it makes me less hopeful.  The market rarely goes up while the pink line goes down…  so I’m more bearish on the market.  Stay tuned for further developments!

About henry

Henry Crutcher is an avid family guy, board gamer (think Settlers of Catan, Puerto Rico, etc), computer nut, and all around geek. Hailing from Louisville, KY, he has noticed that the weather in Louisville is remarkably similar to the weather in Atlanta, GA despite the 407 miles that separate them. He has two daughters, one cat, and lots of trees. He loves the Miles Vorkosigan series from Lois McMaster Bujold, for its mix of SF, comedy and insight into how people work. He also comsumes more than his fair share of cheesy business/economics books, such as The Ascent of Money by Niall Ferguson, or Farewell to Alms, by Gregory Clark.

More Stories


  1. henry Eric Darnel says:

    Very interesting. If I do the same with free cash flow, however, I see this has been increasing lately, which is re-assuring.

    Eric D.

  2. henry boris n. says:

    Shiller CAPE shows a similar decline in earnings. See charts at multpl for a longer time frame.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.