Is Earnings a Red Herring for Stock Yield Seekers?


«From 1904 to 2020, earnings growth and stock returns moved in parallel for specific time periods,» said Rabener, noting results based on the five-year rolling returns calculated for both time series. «[H]However, there have been decades when they diverged completely, which is highlighted by a low correlation of 0.2. «

The analysis was repeated with roll-return windows of one year and 10 years; Other attempts were more about real than nominal stock market prices and profits. In all cases, Rabener said the correlation between US stock market returns and earnings growth has been «essentially zero» over the past century.

Rabener tested the possibility that stock prices were dependent on expected rather than actual returns and described further analysis that focused on earnings growth for the next 12 months. The assumption was that investors were making perfect predictions for US equity gains.

«[K]Seeing earnings growth rate ahead of time would not have helped these super-investors time the stock market, ”he said. “Returns were only negative in the worst decile of the percentile of forward earnings growth. Otherwise, whether the earnings growth rate was positive or negative had little impact on stock returns. «

Rabener expanded the analysis to include earnings growth and P / E with the expectation of «a strong positive correlation, as investors reward high-growth stocks with a high multiple and punish low-growth stocks with a low multiplier» – an explanation often offered for the extreme of valuations soaring tech stocks.

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