Stocks often rise in years when earnings fall 🤯

The counterintuitive stock market stat that's getting passed around 🔀

There have been many years when earnings fell but stocks rose. (Source: Janus Henderson)

Earnings are the most important driver of stock prices in the long run.

But in the short run, their relationship isn’t as clear.

In December, I shared the chart above showing that the one-year change in S&P 500 earnings has a very weak linear relationship with the one-year change in the index’s price.

Since then, a number of market watchers I follow have pointed out and shared what’s going on in the upper left quadrant of the chart: There are many years during which earnings fall, but stock prices go up!

Ritholtz Wealth Management’s Michael Batnick and Ben Carlson highlighted this phenomenon their brilliant ”Animal Spirits” podcast with a chart from Evercore ISI.

Seth Golden of Finom Group shared a slightly different visualization from Strategas Research. It shows that in 11 instances when S&P earnings (green bars) were down by at least 10% for the year, the index was either flat or up nine times.

Stocks often go up in years when earnings are down. (Source: Strategas Research via @SethCL)

Indeed, it confirms the old saying: “The stock market usually goes up.”

This is a salient observation in the early days of 2023, as many bearish stock market forecasts for the year are predicated on the idea that earnings are expected to be revised lower.

And while this phenomenon is counterintuitive, it’s not necessarily a reflection of irrational behavior.