Financial Myths Exposed: Higher L-EARNINGS

It's time to unlearn one of the most widely held "truisms" of Wall Street: i.e

. Earnings Drive the Stock Market.

By this line of reasoning, knowing where the stock market will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. Ipso Facto: Earnings data is the alleged Grand Poobah of fundamentals with more time spent watching for its release than the iPhone 4.

On this, the recent news items below take it from here:

"Stocks Rebound As Investors Await Earnings." (Associated Press)

"US Stocks Drop As Earnings Data Fall Short" (MarketWatch)

"US Stocks Lower As Earnings Disappoint. Right when they think they're starting see [positive signs], they've been hit with pieces in the news that are telling them to be cautious at best." (Wall Street Journal)

Now for the unlearning part: First, earnings are not an accurate reflection of a company's future growth; but rather, a summary of past performance. Here, the December 2009 Elliott Wave Financial Forecast draws the following conclusion:

"Quarterly earnings reports announce a company's achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes."

(Is The Bear Market Gone For Good? The latest Financial Forecast Service measures the strength of the stock market against current conditions, NOT those of the past.Get the objective take today, risk-free)

Second, there is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Case in point: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period.

Here again, the December 2009 Elliott Wave Financial Forecast presents a groundbreaking chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.

As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded a powerful, one-year rally to the late April 2010 peak.

In the end, earnings data are either a reflection of activity in the past OR of fear/hope-based expectations of the future. Neither one is here. Neither one is now.

Financial Myths Exposed: Higher L-EARNINGS

By: ekanem uwemedimoh

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