Rising Earnings Per Share Shows Continued Stock Rally
Earnings season is underway. Right now, companies are reporting their results for the third quarter of 2017. And it’s set to be a historic event.
Earnings should reach a record high. Trailing 12-month earnings per share (EPS) measures earnings over the past 12 months. This quarter, analysts expect the companies in the S&P 500 to report record-breaking EPS.
Earnings suffered a bear market starting in 2014. EPS fell for three years and began recovering just six months ago. The chart below shows this.
(Source: S&P Capital IQ)
The chart also shows the last time earnings surpassed the previous high. Traders recognized how important that was, and prices soared.
Over the next four quarters, the S&P 500 delivered a total return of 26%.
Over the past year, the S&P 500 has already gained more than 20%. Skeptics argue another large gain is unlikely.
But the S&P 500 gained 13% in the four quarters before the last EPS record.
Earnings drive returns. As EPS approaches all-time highs, stocks should rally. In the past, after setting the new high, the rally has continued.
I’ll explain why in a future article, but the next recession is likely to start about a year from now. There will be a bear market during that recession, probably around this time next year.
That means we should enjoy the rally in stocks for as long as it lasts.
Michael Carr, CMT
Editor, Peak Velocity Trader