≈ Earnings. ≈
Traders,
There are two ways to explain market growth. It either comes from earnings growth or multiple expansion. In the former case, valuations either hold steady or shrink. In the latter case, valuations increase. That is, stocks get more expensive.
Let’s say the market P/E ratio was 20. If the S&P 500 rises 10% over the next year, but earnings also rise 10%, then the P/E ratio would remain at 20. That’s an example of the stock market’s gain being driven by profits.
Now, let’s take the same situation but assume earnings didn’t grow at all. If the S&P 500 climbs 10% over the next year without any accompanying jump in earnings, then the P/E ratio would rise to 22 – signaling stocks are now more expensive. This is known as multiple expansion because stocks are currently trading at a higher multiple (22x earnings) than they used to be.
Both potential fuels are not created equal. Earnings growth is far more potent. I’ll repeat it for emphasis – it allows stocks to rise without getting any more expensive! And that, in turn, means the market’s climb is more sustainable. It was built on a sure foundation, not just hope or hype.
The chart of the day reveals which of the two is behind this year’s bull run.
#TeamTackle
Chart of the Day
Earnings is Fueling the Rise
The market is 20% higher right now than at the end of last year. But it’s not 20% more expensive. Earnings growth has seen to that.
Video of the day
Trade Masters
Join Coach Greg, Tyler, and Mark for another edition of Trade Masters.
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Cash Flow Club 8:30 PM EST
Join Gino Poore as he hosts the weekly Cash Flow Club.
Financial freedom is a journey
The Tackle Today series is brought to you by Tackle Trading.
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
# Sign up now for a 15-DAY FREE TRIAL #
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
