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Tackle Today: This is What Drives Stocks in the Long Run

April 7, 2021

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Earnings, it’s always earnings


Benjamin Graham said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” The longer you invest, the more you’ll discover the truth of this statement. Sentiment, or the masses’ feelings due to news, trends, politics, or the economy, is the ultimate driver of prices in the here and now. But in the long run, it turns out that all of that goes away. What’s left, and ultimately what is weighed, is earnings.

Indeed, over long periods the link between corporate profits and the aggregate stock market is unbreakable. In other words, the fundamental chickens eventually come home to roost.

Our chart of the day comes from investment management firm Alger. It shows that “over the past 120 years, the S&P 500’s price has increased 5.3% annually, driven by a 5% compound annual growth rate in EPS. In other words, 95% of stock market price appreciation has been driven by earnings growth.”

You’ll experience episodes in the market where quarterly earnings don’t matter at all. Unprofitable companies sometimes soar while profitable ones sink. But it’s an anomaly! Never forget: In the long run, earnings is all that matters.


Chart of the Day

Earnings Drives Long-Term Price Appreciation

As long as earnings continue to rise over time (hint: they will), stock prices will do likewise. The story of the past 120 years is that declines are temporary, and the advance is permanent. Remember that next time there’s an apocalypse scaring the children.

Video of the day

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