If there is one relationship to understand, this is it.
- This chart shows the S&P 500 index alongside its quarterly earnings per share since 2010.
- The stock market is driven by the earnings of its constituent companies. If earnings are rising, investors are generally willing to pay more.
- Earnings generally track economic growth; thus, a healthy economy tends to result in rising EPS and therefore a rising stock market.
Yes, there are other factors that impact the stock market—things like interest rates, growth rates, current valuations, investor sentiment, and political events, just to name a few—but the growth in corporate earnings is THE #1 driver of stock market returns over time. Period.
-Paul R. Rossi, CFA