Do Poor Earnings Mean Declining Markets?

You guys know that I am a pure Technical Analyst. Yet, today I am going to throw a bit of fundamentals into the mix. I’ll be talking about the relationship between earnings and stock market performance. Do Poor Earnings Mean Declining Markets?

2023 was an unusual year, insofar as earnings vs. stock market performance was concerned. Investors drove stock prices higher without improving fundamentals (earnings). Let’s look at the relationship between earnings and stock market returns over the past 15 years (since the 2009 crash). Can we predict market returns by earnings growth?

To start, the rise in a stock (or index) can be due to three factors:

  1. An increase in earnings per share
  2. An increase in the valuation investors place on those earnings
  3. Dividends

I’m going to start off by comparing earnings trends to market performance trends. Dividends are almost never the primary driver of price.

SPX vs Earnings (Trailing)

Below is a chart of the SPX earnings (black line) vs the SPX index (red line). From left to right, note my arrows:

  • Flat earnings (no/low growth environment) don’t always mean a declining stock market. But they can mean an initially less enthusiastic market before it rises. Check out 2011/2012 (left side of chart) as an example.
  • Declining earnings, like in 2015 (a result of the low growth economy in 2013), resulted in a declining market. That was corrected to the upside for the SPX in 2016 while earnings were flat. Declining earnings also occurred during rapid market declines like the sub-prime 2009 crash (not shown) and the COVID crash of 2020 (seen below). Declining earnings were also coincidental with a declining market in 2022.
  • Flat/slightly rising earnings were seen in 2023. Meanwhile, the SPX took off like a bat outta hell (credit to Meatloaf). That’s what I’m here to discuss today.

The big question: If earnings continue to be flat—will markets decline?

SPX Earnings (GAAP) INDX (January 16, 2024) | Do Poor Earnings Mean Declining Markets?

Last year was driven by an increase in multiples, not fundamentals

Almost all of the S&P 500’s returns last year were due to an increase in the valuation (PE). Very little of it was driven by an increase in actual earnings – as the rather tame looking earnings (black line, above) illustrates. This happens often enough – history shows us that the SPX foresees future earnings strength and can rise prior to that happening. Check out 2012, and 2020 above.

However, what happens if, after the the index’s rise due to an expansion in valuations – earnings don’t follow through?

The chart below – courtesy, shows us PE ratio (orange), Earnings (blue), and dividends (grey) in their contribution to returns on the SPX.

Contributions to S&P 500 Returns (2003-2023) | Do Poor Earnings Mean Declining Markets?

The above chart, courtesy of, illustrates how  much of the gain in the SPX was due to an increase in the multiple in 2023. This situation is much like 2012/2013. If you look at my top chart, you’ll note the rising SPX with flat earnings during that period. However, you’ll also note that by mid 2013 earnings began to rise aggressively. The rising SPX during 2012 was justified – the market was looking forward. It correctly foresaw rising earnings.

This happened in 2020, too. the SPX fell with earnings at first, then began to rise aggressively – looking forward, correctly foreseeing rising earnings ahead.

Conclusion – Do Poor Earnings Mean Declining Markets?

In 2023, the SPX was foreseeing rising earnings ahead – witnessed by its strong performance. The SPX has been accurate in the past by rising ahead of earnings growth, seen in the above charts.

However…. If earnings don’t follow through, and companies earn less than expected, stocks could be very vulnerable to a correction. The SPX’s rise in 2023 was predicting a renewal in earnings growth coming.

The beauty of Technical Analysis.

At the end of the day, we need only pay attention to price. It makes no sense trying to figure out if the market has it all wrong this time, especially in the context of declining markets. Instead, we should follow our rules and trade accordingly. For those who have not taken my Online Trading Course, now might be a good time to do so. Conversely, if you prefer to have a professional manage your money, click here to learn the ways to get ahold of us to discuss your situation. Happy trading!


  • Two questions. When these type of charts are used do they refer to adjusted earnings or diluted earnings? There is often a wide gap.

    Growth from future cash flows will drive the price of stocks as well. They may have low earnings but buyback shares which increases the earnings per share. How does discounted future cash flow fit into the above?

    • David–the stockcharts earnings line on my graph is using GAAP earnings which are NOT adjusted.
      “GAAP EPS or “EPS” shall mean the diluted net income per share of the Company’s common stock as determined on the GAAP basis plus the effect of restructuring and other charges as of Year-end for each Plan Year.”
      You are asking a TA about fundamentals re your growth from future cash flows affecting stocks questions. I’m not the guy to ask–my perspective is a relatively simple one that stock prices discount the future, however the market may do that (via buyer/seller crowd sentiment, or actual fundamental analysis)

  • Thanks Using the GAAP eps certainly projects higher price to earnings in some sectors as adjustments are used pretty liberally.

  • thanks for sharing these charts.
    To me it looks like the earnings are more or less correlated with the market except when large shocks to the system occur such as the GFC or pandemic.
    It is interesting that the earnings jumped ahead of the market after the GFC but the opposite happened during the pandemic. Was it because of where Liquidity was injected? into the banks in the former & into the economy in the latter.?
    The one exception I see is the end of 2018, if I’m not mistaken I believe major corporate tax hikes occurred.

    • I’d think you are correct about the liquidity bump after the financial crisis.

    • Dave–markets spike all the time, and as I noted in a recent blog, I expected that the 4800 would be broken in the nearterm–but the question is, will it last. My comments on that blog were to see if the 4800 can hold for a bare minimum of 2 weeks before getting too excited. Still, yes, it is encouraging.
      Here is my blog with those comments:

  • Hi
    thanks for the charts
    on a different note, i was wondering about gold and why the gold stocks are not participating. do you think gold is just going to fade away here

    • Yes, the gold stocks are not participating with the bullion’s rise yet. I’d think if gold does continue to show the breakout is real, there will be catch-up. But it has been a patient persons game so far!


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