How Earnings Can Guide Investors

This is Brad Barrie, Chief Investment Officer, and Portfolio Manager with Dynamic Wealth Group. Welcome to this market and economic update. In this video, we’ll discuss findings from the latest corporate earnings season for the first quarter and how it impacts markets.

Investors always watch corporate earnings announcements carefully, but there has been extra attention on company results this quarter. This is because investors are looking for hints as to whether the economy is slowing or if it will continue growing steadily. After all, factors like high interest rates take time to filter through the economy and impact consumer spending and corporate profits.

Over the next few minutes, we’ll discuss the earnings outlook and why long-term investors should focus more on these trends rather than day-to-day stock market swings.

First, it’s important to remember that the stock market tends to follow the trajectory of corporate earnings over time, a pattern that is clearly shown in this chart.

I like to explain it this way: Realize when you own a stock, you are part owner of that company. Just like if you owned a small restaurant or retail store. As an owner, what makes you money? More customers eating in your restaurant or buying your products. It’s basically the same with stocks.

So, while investors often focus on the economy, we do not invest in the economy directly. Rather, we invest in the stock market which depends on the financial performance of companies. In turn, how companies do depend on the underlying economy including consumer spending, the job market, inflation, and more.

This chart also highlights how we can think about stock market swings. During difficult periods when the stock market might decline, a strong economy will help to support stock prices. After all, if stock prices fall when earnings are still strong, valuations will become more and more attractive.

The situation is different if the market falls due to an economic shock or recession. That’s why bear markets tend to occur during recessions when it’s unclear what the earnings outlook might be.

Thus, corporate earnings are among of the most important factors for long-term investors.
Next, this chart shows the earnings growth rate for S&P 500 companies since the mid-1980s.

What you can see on the right is that earnings struggled the past few years but began to accelerate again in the third quarter of 2023. There has been a delayed effect between steady economic growth and corporate profits, but there are signs that companies are beginning to benefit from economic trends.

This also matters because many valuation ratios depend on these financial measures. The price-to-earnings ratio, for instance, has risen significantly over the past 18 months as the market has rallied. The ratio is now around 20 times forward earnings since earnings growth was stagnant over much of this period.

However, with earnings growth now accelerating, the hope is that valuations will begin to look more attractive. Another way to put this is that investors anticipated stronger earnings growth which led markets to rally ahead of time.

Certainly, as we say, we are not in the business of predicting the future, but rather preparing for the future regardless of what happens. So, maintaining a properly truly diversified portfolio, is always recommended.

Finally, this chart shows that economic growth has been steady over the past several quarters despite investor concerns.

In fact, the number of references to the word “recession” in corporate earnings calls fell to its lowest level in two years. Other sources of data, including the Federal Reserve of Richmond’s CFO survey, suggest that corporate executives are increasingly positive on the economy.

While these figures can change, they are just a few data points, they are positive and do suggest that steady economic growth could translate into better corporate profits. The hope is that this also supports the stock market, just as it has done over history. This is an important reason that investors should focus on these longer-term trends rather than daily stock market movements.

We hope you found these insights valuable. If you are a financial advisor and would like more information on our Multi-Dimensional Approach towards asset management, please visit our website, or reach out directly by emailing us at: If you are an individual investor, we are happy to address any questions you may have and put you in touch with a qualified advisor if so desired. Until next time, take care everyone, and make smart, logical & fact-based financial decisions.

Clearnomics and Dynamic Wealth Group, LLC are not affiliated entities. No part of this should be taken as investment advice. Consult your financial advisor for specific investment recommendations tailored to your specific situation.
Dynamic Wealth Group (“Dynamic”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Dynamic by the SEC, nor does it indicate that Dynamic has attained a particular level of skill or ability. This material prepared by Dynamic is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Opinions expressed by Dynamic are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Dynamic, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.
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Dynamic Wealth Group Market Update: How Earnings Can Guide Investors. Explore insights on how corporate earnings impact investment strategies and long-term financial goals. Simplifying complexity for better investment decisions.
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