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.

  1. 2010
  2. 2004
  3. 2005
  4. 2006
  5. 1993
  6. 1994
  7. 1988
  8. 1965
  9. 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.

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