Study: strong earnings growth is bullish for stocks
The S&P 500’s earnings growth is projected to be very strong in 2018: mid-high teens (i.e. 15-18%). Growth tends to come down as the year goes on, but even then the earnings growth rate will still exceed 10% for this year.
This is the second year in a row in which the S&P 500’s earnings growth exceeded 10%. The S&P’s earnings growth in 2017 was 13.1%.
Here are the historical cases in which the S&P’s earnings growth exceeded 10% for 2 years in a row. Historically, the U.S. stock market tended to go up.
- 2010
- 2004
- 2005
- 2006
- 1993
- 1994
- 1988
- 1965
- 1955
Here are those historical cases in detail and the U.S. stock market’s reaction.
2010
The S&P closed the year 12.7% higher than the previous year’s (2009) close. The S&P made a “significant correction” during this year.
2006
The S&P closed the year 13.7% higher than the previous year’s (2005) close. The S&P did not make a “significant correction” during this year.
2005
The S&P closed the year 3% higher than the previous year’s (2004) close. The S&P did not make a “significant correction” during this year.
2004
The S&P closed the year 8.9% higher than the previous year’s (2003) close. The S&P did not make a “significant correction” during this year.
1995
The S&P closed the year 34.1% higher than the previous year’s (1994) close. The S&P did not make a “significant correction” during this year.
1994
The S&P closed the year -1.5% lower than the previous year’s (1993) close. The S&P made a “significant correction” during this year.
1988
The S&P closed the year 13.9% higher than the previous year’s (1987) close. The S&P did not make a “significant correction” during this year.
1965
The S&P closed the year 8.3% higher than the previous year’s (1964) close. The S&P did not make a “significant correction” during this year.
1955
The S&P closed the year 24% higher than the previous year’s (1954) close. The S&P did not make a “significant correction” during this year.
Conclusion
As you can see, the S&P 500 tended to go up in the second year when the stock market’s earnings growth exceeded 10% for 2 years in a row.
The S&P 500 closed higher in 8 out of 9 of these historical years.
This suggests that strong earnings growth will propel the S&P 500 higher throughout 2018. Expect increased volatility, but the stock market will probably go higher.