Stock Market Earnings - Fundamental Analysis For Long-term Stock Market Investors

Fundamental Analysis Indicators and indexes help us to understand the drivers of markets (fundamental indicators). If the indicators are showing strength then we remain invested. If we see a weakening across the board of these fundamentals, only then should we think about selling.  

Demand determines supply which creates corporate earnings and profits. Our 'Demand' page looks for signs of a secular drop off in demand for our first indicator of a secular downturn. This page considers the other side of the Supply & Demand coin measuring the supply (earnings) generated to meet the demand.

A decline in company earnings is another closely monitored metric associated with downturns and crashes. If earnings start to disappoint across the board then we have a slowing economy and are likely to see job losses. It's those job losses that lead to recessions and declines in our global equity funds. Speaking of which, the Yardeni link below gives us a view of earning for global stocks so it better suited to you if you are invested in standard globally diversified stocks funds...

Factset US Earnings
Yardeni MSCI Global Earnings

Yardeni S&P 500 Earnings & Dividend Yields

Yardeni S&P 500 Earnings & The Economy

Yardeni S&P 500 Earnings Forecast/Outlook

SP500 Earnings Per Share: The US S&P500 is the largest stock market in the world and therefore takes up a significant proportion of most global funds. If earnings of these companies start to decline on a secular basis (see the chart/image below) it can spell bad news for the SP500 and therefore our global funds. So we need to keep an eye on 'trailing' and 'forward' Earnings Per Share for the SP500 and when earnings revisions go negative.

The US S&P500 earnings per share, forward and actual on the Yardeni chart below show the clear downturn in these metrics before the 2001 DotCom crash and 2008 GFC crash. The actual earnings are more sensitive to a downturn so that seems to be the one to watch. As of time of writing in 2024 both are on an upward trajectory.

CAN FORWARD EARNINGS GROWTH ESTIMATES BE TRUSTED?

A word of caution in SP500 forward estimates... they have a reputation of being overly optimistic: - 

• SP500 EPS Forward Estimate (Ycharts)

What can't be massaged to influence investors is ACTUAL SP500 earnings. The trend in earnings turning down is a warning sign that stocks could run into headwinds in the near to medium term. 

• SP500 EPS ACTUAL (Ycharts)

The medium trend will inform us where we may be heading over the next six months to a year. The longer term trend (quarterly) may give us a better idea if we are heading into a deeper drawdown. (See the DotCom bust earnings crash (2000) and GFC downturn (2008) below. 

• SP500 Earnings Growth Per Quarter (Multpl)

Are Corporate Earnings Heading Down?

In the previous 2 financial busts, corporate earnings started trending down way before the recessions were declared. At the time or writing in 2024 corporate earnings are heading up pointing away from recession you could argue. But. there is always a lag between changes in monetary policy and the economy. If those corporate earning start trending down it would be another tick for the case for the next crash...

In the previous 2 major recessions (the grey bars below) we see both Advance Retail Sales and Corporate Profits drop below the zero line (both on a Y on Y basis)...