Earnings Drives Stocks, And That's A Good Bottom Line
Since April 1991, a dollar invested annually in the average company in the Standard & Poor's 500 index averaged a 7.4% total return, driven by profits that grew an average of 7.4% annually. In 2017, 2018 and 2019, earnings growth of 11%, 12% and 10%, respectively, are expected. This why the Standard & Poor's 500 index returned 22% in 2017 and continues to climb in 2018.
At 103 months, this expansion is the third longest in modern U.S. history, behind the 120-month boom of the 1990s and the 106-month-long expansion of the 1960s. This growth cycle could set a new modern record, but you never really know what's going to happen.
The S&P 500 has broken new record-highs repeatedly since the November 2016 election. Yet plenty could go wrong: rapid growth spurred by the new tax act increases the likelihood of a Fed interest-rate policy mistake, quashing growth or accelerating an inflationary spike. Meanwhile, a constitutional crisis, the nuclear standoff with North Korea, and unspeakably nightmarish events may seem suddenly more imaginable.
A 10% or 15% drop could occur in a flash of bad news and the chance of a bear-market decline of 20% or more increases as the long bull market grows older. But the economy shows not a whiff of recession. To the contrary, smashing earnings growth is expected, and that's literally the bottom line.
This article was written by a professional financial journalist for Tapparo Capital Management and is not intended as legal or investment advice.
Halloween has arrived early! You would think this if the recent stock market action was any indication of such.
It is entirely normal to have a reaction to yesterday's stock market drop - probably a very...