Equity prices follow earnings. While in the short-term a company’s stock may fluctuate wildly due to any number of reasons, the stock price will follow earnings. So if earnings per share continue to grow year after year the stock price will also go higher.
The following chart shows the relationship between S&P 500 price returns and earnings per share from 1925 thru 2016:
Click to enlarge
Source: Equities must crash because they outpace GDP: Fisher’s financial mythbusters by Ken Fisher, Money Observer
Other than a few blimps, the price returns has followed EPS over the many decades since the 1920s.
So the takeaway for investors is that rising earnings is more important for stock prices to move higher.
Related ETF:
- SPDR S&P 500 ETF (SPY)
Disclosure: No Positions
