Earnings vs. the stock market – a wealth of common sense

Investors tend to focus on a wide range of variables – the Fed, geopolitics, interest rates, inflation, economic growth, etc. – but corporate profits are the biggest driver of stock market returns over the long term:

That said… the relationship between earnings growth and stock market returns isn’t always as clear as it is in 2025.

There are plenty of times when profits and the market are out of sync.

Here’s a look at the annual returns for the S&P 500, along with the change in year-end earnings going back to 1930:

You can see that the relationship between the two growth rates is not exactly one-to-one in most years. In fact, there are plenty of years where yields rise but profits fall, and vice versa.

Here’s another way to visualize this:

The quadrant with the most points is that earnings are rising and stocks are rising. That happened in 47 of the past 96 years, about half the time. Then there were eight years in which stock prices and profits fell simultaneously.¹ This also makes sense.

So far so good.

But there were 24 cases where profits fell in the same year. The shares ended the year with an increase.

And there were seventeen years in which the stock market fell, but profits actually rose.

That means that stocks and profits in any given year have gone in different directions almost 45% of the time since 1930. In almost half of all years, the relationship between profit growth and price growth disappears.

There are of course explanations for this.

Profits are reported with a delay. The market is looking ahead. Sometimes investors’ expectations are sidelined.

This is a good reminder that long-term market forces can often be distorted in the short term. Even if you knew what earnings would do in a given year, it doesn’t necessarily mean you can predict what will happen in the stock market.

Stocks can rise during an earnings recession.

Stocks can fall when profits rise.

There’s a lot on the table in any given year, as emotions, trends and expectations often have more to do with short-term performance than fundamentals.

Plan accordingly.

Michael and I talked about corporate profits, small caps, the stock market and more in this week’s Animal Spirits video:



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¹The reason you don’t see 2008 in this chart is because profits fell by almost 80% that year. We had to cover the axis on the map to make it easier to read. So 2008 is included in the total, you just don’t see the dot. The same goes for 2009, when profits grew by more than 200%.