Earnings Are Wow!

Public companies are reporting fabulous earnings. On average, this past quarter’s earnings were up 26 percent over the same period last year. And these are not just a few companies. 86 percent of the firms reporting so far have met or exceeded expectations. Importantly, companies indicate that business conditions continue to be excellent. So, there are good reasons to believe that good stock market returns should continue.

The Lonely Bull has stated many times that earnings are the key to valuing any company. The more they earn, the more they are worth. Certainly, other near-term considerations come into play. For instance, if there is an international crisis, perhaps a lack of buyers may affect pricing. However, over time, earnings are what matter.

The question investors must ask is how sustainable is this earnings pace of growth? The practical answer is that it isn’t. Nothing can grow indefinitely at this pace. However, even if profit growth slows, it has already set a higher level of value. It’s just that further stock market gains would slow commensurately. Nothing indicates that values must fall. Stay steady my friends.

-The Lonely Bull