The Worst Earnings Season in Years Still Beats Expectations

November 14, 2011 - Earnings have mattered a lot for the U.S. stock market. Over the past three years, earnings are up about 58% and the S&P 500 is up about 55%.* That one-to-one relationship is no coincidence. Stock market valuations, measured by the price-to-earnings ratio — or what investors are willing to pay per dollar of current earnings — have not changed over the past few years and remain around 13 for the S&P 500, well below the long-term average. The relentless climb in earnings has been what has pulled stocks higher over the past three years, not increasing optimism in the durability of the business cycle.

*Earnings data are from the fourth quarter of 2008 through the fourth quarter of 2011. S&P 500 data are from the fourth quarter of 2008 through February 10, 2012.

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