As we often say, corporate earnings are the key to future stock market growth. The housing picture is simply the largest element impacting current and future earnings. Over the last 100 years earnings growth for stocks has averaged just over 5.5%. It’s not surprising then that stocks have roughly grown at the same rate over that period. The chart below shows 20 years of S&P quarterly earnings with a smooth 5.65% average. As you can see, earnings overshot in 1999 and then got well below their historical norm in 2002. The rebound was furious and helped mostly by massive leverage and home speculation. In typical bubble fashion, the fall has been far faster than the rise. As in 2002, we fully expect earnings to overshoot to the downside and potentially near as low as $50 per year on the S&P.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.