Noise is all around us, it’s everywhere. The phone we all carry not only makes calls, it’s also a noise amplification machine…making it difficult to discern between all the noise around us and valuable signals.
The stock market is no different.
Stock market “noise” refers to the short-term fluctuations and irrelevant information that can obscure the truth and the true underlying value of financial assets.
Noise is the background chatter that can cloud good judgment. It includes the daily price swings, news headlines, rumors, and random market movements that do not reflect the underlying fundamental value.
Noise is often driven by factors such as investor sentiment, market speculation, and external events that have little to no long-term impact on a company’s performance or the broader market. For example, a sudden drop in stock prices due to a rumor about an economic policy change, which later proves to be unfounded, would be considered market noise.
Noise can make it difficult for investors to distinguish between meaningful signals—indicators that genuinely reflect changes in value—and irrelevant distractions. This can lead to impulsive trading decisions based on short-term events rather than long-term investment strategies, potentially resulting in suboptimal financial outcomes.
While short-term market volatility is noise. Over the course of market cycles, the stock market mirrors the trajectory of corporate profits – this is the signal. This is because shares of a stock represent an ownership claim on a company’s profits. So, while markets can and do experience short-term turbulence, a steadily growing economy and rising corporate profitability drive long-term market returns.
This is clearly demonstrated in the accompanying chart which shows that while markets and earnings do not move in perfect lockstep, over the medium to long-term they are highly correlated.
Over the past twelve months, S&P 500 earnings have risen to $232 per share, a healthy growth rate of 7.4%. This has accelerated with second quarter S&P 500 earnings rising at a blended growth rate of 10.9% (FactSet data).
If there was one superpower to have, it would be the ability to accurately filter out the everyday noise.
We are being bombarded with noise…ignore the noise and focus on the signal.
-Paul R. Rossi, CFA