A recent article in The New York Times says, “Investors are not rewarding American corporations for the best profits they’ve reported in years,” noting that 87 percent of companies reported second-quarter earnings surprises compared to the 70 percent average of the past five years.
“Heading into 2018,” the article notes, “many market watchers pointed to corporate earnings to explain their rosy outlook for stocks. Yet, despite this performance, the stock market has been lackluster.” The article suggests that rising trade tensions could be the biggest culprit, adding that expectations and valuations also play a role—investors have “already priced in big earnings from corporate America,” it says, noting that the forward P/E ratio of the S&P 500 of 16.5, “slightly above the 10-year average of 14.4.”
But the relationship between earnings and stock market performance, the article concludes, “is sometimes not cut and dried. Bank of America Merrill Lynch looked at 90 years of stock market data and found that the S&P 500 was slightly more likely to finish a year lower when earnings growth topped 10 percent than when it failed to reach double digits.”