What’s the Right Way to Think About Corporate Earnings?

Transcript

Ken Fisher:

One of the things that, you know, people struggle with, ask about, think about, think they know about when often they don't, is the relationship between earnings and stocks. The fact is, way too much attention is paid to things like corporate earnings announcements, where they think the corporate earnings announcement is telling them something about what's ahead that's useful in predicting stock prices. Paying attention to things like what that does to the relationship between price and earnings, a.k.a. price-to-earnings ratios.

The fact is, in an overly simple sense, making it as simple as I can, what stocks want to do is price today the best guess that the market can make—as if it was a kind of a living entity, a spiritual entity smarter than any of us— on what earnings will be over the approximate next 3 to 30 months. Approximate—sometimes a little longer, sometimes a little shorter— and what that's worth now. Now, mind you, when I say that, 3 to 30 months, for different companies at times, the market will be paying attention on the shorter end of that. Other companies may be on the longer end of that and at times for all companies, more on the longer end, more on the shorter end. But the market isn't pricing the earnings that just happened. That's the past. The market doesn't give a darn about the past. The past is over. The market also doesn't really care about what earnings are. 5, 10 years from now. It doesn't really believe that. It prices earnings moving forward. It is a leading indicator. It prices ahead of the earnings.

It has a great knack— not a perfect knack—a great knack but better than do we collectively as individuals if we were vocalizing as if we were doing a survey or a poll on what earnings will be, and are they valuable or not? Valuable or not comes back into concepts like the value of what the entity is doing with those earnings at that moment in time, will we continue to see that as good or bad, or will we instead be changing our mind? Now, mind you, this is going to include companies whose earnings are growing. Companies whose earnings are falling apart temporarily. Companies that are in the process of having themselves turned around right now, or maybe next month or the month after. But what it's valuing is that approximate 3 to 30 months into the future. That's the hard part for people to grasp, because they tend to either want to look at what just happened with the earnings release that occurred, and all that is, is short-term noise and volatility. Let me come back to that in a moment. Or what earnings will be long-term out, which again markets won't price.

So, we're at this point in time as I'm speaking to you, in the back of November, And in the end of the second week in November, Nvidia—big stock, highest valuation in the world, heavily paid attention to—announced earnings. Before that, there was great fanfare, as in drum rolling or what have you, and the earnings are coming at 3 p.m., 4 p.m. Eastern time, as the market closes, and they will be a harbinger of what's true for AI ahead and, and, and, and, and. And media wanting to focus on this and people being interviewed about this and, and, and, and, and, and, and the release from Nvidia came out stronger than expected. And in the futures overnight and the next morning, sure enough, the stock shot up. But by the late morning the stock had reversed all that. Volatility. Not direction. That's what I'm wanting you to get at. The earnings that they announced already happened. The longer-term projections they make don't matter.

What matters in the market prices is the next approximate 3 to 30 month's earnings. It values that it doesn't think like, "Boy oh boy. The earnings were a notch better than people expected, so, that tells you something about the future." It doesn't. And in fact, let me go back to a different point. One of the things that people are always doing is forecasting earnings ahead into the future. The reason that also isn't useful, in a precise metric-able way, is because those earnings forecasts already include your bullish or bearish sentiment and someone else's that may be the reverse of yours. The market is taking into account of that for all of us, all of the time, about as accurately as it can be done. It's pre-processing those future earnings. That's what it does, if you will, for a living.

Thank you for listening to me. I hope you found this useful. It probably didn't give you an answer that you wanted, like, give me this, that I can go and make a lot of money on. But I'm telling you to not waste time on that which won't make you a lot of money with the things that some people seem to want to focus on. Thank you for listening to me. I hope you found it useful, educational, and at least somewhat enjoyable. Hi, this is Ken Fisher. Subscribe to the Fisher Investment YouTube channel. If you like what you've seen. Click the bell to be notified as soon as we publish new videos.