Personal Wealth Management / Expert Commentary
Fisher Investments Reviews How Stocks Can Rise As Earnings Fall
Ken Fisher, the founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, explains how stocks can rise despite flat or falling corporate earnings. While some may find it hard to fathom, markets price in the future—typically looking 3 to 30 months ahead—and not past earnings or projections. Ken notes the economy typically bottoms out an average of six months after the stock market.
The stock market rises after a bear market’s bottom, says Ken, but earnings and earnings projections continue to fall alongside sentiment. Ken says forward-looking markets can shrug off poor earnings and dour expectations because they are always looking past the current economic reality. Instead, markets price what the future is likely to be.
It is almost inconceivable to so many people that stocks can be going up when earnings are going down. This topic is one like so many others, that's so obvious once you get it. But it's so hard for people to get.
Reported earnings are about the past. Consensus projection estimates about future earnings are always sentiment statements which the gloomier we get, the lower the earnings projections move to. What markets price, is what the future will really be. And as I often say, markets are pricing roughly three months into the future to 30 months into the future. Sometimes a little longer, sometimes a little shorter, mostly someplace way in between there. And markets are looking past current, always.
There's just not a milestone that links earnings falling to what they'll be down the road. So let me give you an example. The stock market legendarily, and pretty much always, falls into a real recession in a bear market format. And bottoms well before the economy bottoms. On average, about six months because it is markets looking into the future when people really aren't thinking that way.
And then as the economy keeps getting worse after the markets bottomed and going up, because the market's thinking about the future while the economy is still getting worse. Because the economy is getting worse, earnings are getting worse and earnings keep falling. And sentiment has fallen because stocks have been falling and the economy is getting worse. And that makes everybody feel terrible. And with the feeling terrible, earnings projections get worse. Earnings down. But markets are looking past that.
Projections dour, more dour than they were before, because the combination of a bad stock market and economy that keeps getting worse after the stock market bottomed and starts going up, keep people dour. All kinds of signs the economy is worse then. So, right at a bear market bottom, you got a perfect example of earnings going down while stock market going up. Happens every time you get bear market with recession, some rare times you get bear market without recession, but most of the time bear markets recession go together. And every single time, earnings fall. Sentiment drops. Earnings projections keep being dour.
So, whether you're looking at the past earnings reported or future earnings projections, it doesn't look good while the market's going through the roof. And it drives people that don't understand what I've just told you crazy. But that's the way markets work, because markets are always pricing off into the future.
Thank you for listening to me. I hope this was useful for you. Hi, this is Ken Fisher. Subscribe to the Fisher Investments YouTube channel if you like what you've seen. Click the bell to be notified as soon as we publish new videos.
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