You Care About Earnings? The Stock Market Doesn't

As the third-quarter earnings season winds down, was it worth paying any attention? For individual stocks, the reporting period of course makes a difference. The comments that executives let drop on earnings calls can be very useful qualitative indicators of risks and opportunities ahead. And in the long run, profits are of course central to stock returns. The multiples that people will pay for those earnings will move over time, but in the long term, stock prices and earnings tend to move in the same direction:

But what about the short term? Some interesting numbers from BCA Research Inc. suggest we can safely ignore earnings as they have no impact on the direction of the market. While we have seen that profit growth matters in the very long run, it matters barely at all on a quarter-by-quarter basis. In the following chart, BCA compares the S&P 500’s performance during a three-month period starting on the Monday after the second Friday of a quarter, which is when earnings season typically starts, with the increase in index earnings per share announced for that quarter. There was a vague-ish relationship (technical term) for a few years during the post-crisis decade, but none is discernible now: