In times where there are a lot of moving parts, and big uncertainty, it’s a good idea to back to basics. The real engine behind the market moves is corporate earnings growth. As you can see below there’s a big cause-effect relationship between the S&P500 earnings per share rate of change and rate of change of the index returns. According to Factset, for Q3, the estimated YoY earnings growth rate for the S&P 500 is 4.9%, marking the 5th consecutive quarter of earnings growth. Having said that, this growth rate is lower than estimated during Q2 (7.8%) which leaves us questioning the direction of earnings for the quarters to come. If the Fed wants to contribute to managing an economic soft landing it needs to help companies to keep a healthy growth rate, otherwise they will start making adjustments such as reducing headcount, increasing overall unemployment. This week, when the Fed acts, we may see a boost in index returns, but what we need to see to make it sustainable, it’s a timely support of earnings growth.
The change in earnings is the best indicator