SPECIAL EDITION: TKer's 4th year reminded us what drives the stock market 📈🎂
TKer Stock Market Truth No. 5 was very relevant 📜
Four years ago, on October 14, I launched TKer as the newsletter that tells the story of how the stock market usually goes up.
That first year was marked by one of the more dreadful bear markets in recent memory as the Federal Reserve went to war against inflation. The S&P 500 fell 19%.
Year two brought an impressive stock market rebound. It began two days after the current bull market started. That year, the S&P ended up 21% despite lingering uncertainty.
Year three extended the rally, with the S&P surging an incredible 35%. Interestingly, the average annualized return since TKer’s launch was an extraordinarily average 9%.
Year four brought all sorts of craziness: political upheaval following the U.S. presidential election, global trade wars sparked by tariff threats, volatility in interest rates and currency markets, heightened geopolitical tensions, threats to Federal Reserve independence, and a government shutdown, which added to concerns about the quality of economic data.
All this came as economic activity cooled and stock market valuations expanded.
And yet the stock market repeatedly set new all-time highs, climbing 14% during the period.
Why?
It’s tempting to dismiss the stock market rally as one where exuberant traders inflated an irrational bubble.
My main issue with this view is that the most important driver of stock prices has been high and rising.
TKer Stock Market Truth No. 5 🤷🏻♂️
Time and time again over the past year, I found myself falling back on TKer Stock Market Truth No. 5:
5. Earnings drive stock prices
Any long-term move in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings.
News about the economy or policy moves markets to the degree they are expected to impact earnings. Earnings (a.k.a. profits) are why you invest in companies.
Earnings are literally the bottom line. Earnings explain why the stock market has decoupled from the economy. They also explain why the U.S. stock market has been outperforming the world for years.
For stock market investors, all of the challenges I flagged in the intro have only mattered to the degree that they have affected earnings and the prospect for earnings growth.
And throughout the year, companies continued to signal that their earnings were in good shape, despite the new challenges.
This is reflected in analysts’ next-12-month earnings estimates, which have mostly trended higher as the year unfolded.
Indeed, we were reminded that it’s “dangerous to underestimate Corporate America.”
The key phrase of the past year has been “ceteris paribus,” which translates to “all else equal.” Analysts use this caveat when examining and discussing the effects of a variable, assuming nothing else is changing. This language appeared repeatedly in analyst research addressing emerging risks to the stock market.
As we learned again and again, all else is never equal, especially in the business world, where companies constantly adapt and adjust to risks in their relentless pursuit of earnings growth.
Efforts to mitigate risks have been so effective that profit margins have remained high, bolstering earnings growth. And those margins are expected to expand through at least 2026 and 2027, years during which earnings are forecast to grow at a double-digit pace.
To be clear: This doesn’t mean everything will work out as expected. It’s certainly possible that earnings fail to meet or beat estimates. It’s also possible that earnings do great, but stock prices fall anyway.
For now, the market dynamics appear to make sense. Earnings have been going up and are expected to keep going up. And stock prices have followed. That’s been the story for years.
The state of TKer 📈
TKer’s message is increasingly resonating with a growing audience.
So much so, that in the past year, I was invited to discuss markets with Jeffrey deGraaf and Neil Dutta on the RenMac Off-Script podcast, war and tariffs with Barry Ritholtz on the At The Money podcast, TKer’s 10 Truths with Matt Zeigler and Kai Wu on the Excess Returns podcast, AI with Ryan Detrick and Sonu Varghese on the Facts vs. Feelings podcast, and current events with Josh Brown and Michael Batnick twice on the Compound & Friends podcast! I even did a spot on ABC News and wrote a column for the FT! And that’s just scratching the surface!
More than 33,000 subscribers are receiving TKer newsletters in their inboxes. TKer is read across all 50 states and in 178 countries.
Paid subscriptions hit a record high in May, but growth has since plateaued. This is no surprise considering the direction of the stock market.
As I wrote last year (and last month), engagement in markets content tends to be inversely related to the direction of stock prices. It’s strongest when stocks are falling and volatility is high. On the flip side, when stock prices are trending higher — like they have been for most of the summer — fewer people are interested in better understanding what drives the market.
I’ve gotten many suggestions for changing TKer’s content and distribution strategy to boost growth. And I’ve made many tweaks along the way.
But to be clear, I will not make changes for the sake of growth. I’ll only make changes that I think improve value for readers. My No. 1 priority is to produce the best content at the right cadence that best serves readers. I believe that’s what will keep me in business in the long run.
I am not interested in growth strictly for the sake of growth. This is a luxury I have as an independent operator who owns my business. As I said in an interview when I launched:
I can have subscriptions and revenue go sideways or even trend lower for the next 30 years, and that could be totally fine so long as I’m breaking even. You can’t do that at traditional media without getting hell from someone above. Anyone who says otherwise is full of shit.
Pardon my French. But that’s how I feel. I’ve seen too many great, successful brands throw it all away in an ill-conceived attempt to get the next couple of percentage points worth of growth.
That concludes my rant.
Thank you for your support! I’m especially grateful for you paid subscribers. TKer is a reader-supported small business, so paid subscriptions keep me alive.
If you’re a free subscriber and you find value in TKer, please consider upgrading to a paid subscription!
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TKer fucking rocks. Pardon my French
Tker is a fucking legend