I shared this chart not too long ago concerning the basic breakdown of S&P 500 returns in 2025:
The truth that the dividend yield plus the earnings development roughly equalled the overall return makes for a clear story.
Buyers are inclined to give attention to all kinds of variables — the Fed, geopolitics, rates of interest, inflation, financial development, and so forth. — however company earnings are the largest driver of inventory market returns over the long term:
Having mentioned that…the connection between earnings development and inventory market returns isn’t at all times as clear-cut because it was in 2025.
There are many occasions when earnings and the market are usually not in sync with each other.
Right here’s a take a look at the annual returns for the S&P 500 together with the year-end change in earnings going again to 1930:
You may see the connection between the 2 development charges isn’t precisely one-to-one in most years. In actual fact, there are many years when returns are up, however earnings are down and vice versa.
Right here’s one other approach of visualizing this:
The quadrant with probably the most dots is earnings up, shares up. That occurred in 47 out of the previous 96 years, roughly half the time. Then there have been 8 years when shares and earnings each fell concurrently.1 This additionally is sensible.
Up to now so good.
However there have been 24 cases when earnings fell in the identical yr shares completed the yr up.
And there have been 17 years through which the inventory market was down however earnings really rose.
Meaning practically 45% of the time shares and earnings have gone in numerous instructions in a given yr since 1930. Virtually half of all years the connection between earnings development and worth development breaks down.
There are explanations for this in fact.
Earnings are reported on a lag. The market is forward-looking. Generally investor expectations are caught offside.
It is a good reminder that long-term market forces can usually get distrupted within the short-term. Even should you knew what earnings have been going to do in a given yr doesn’t essentially imply you may predict what is going to occur within the inventory market.
Shares can rise throughout an earnings recession.
Shares can fall when earnings are going larger.
Something is on the desk in a given yr as a result of feelings, tendencies and expectations usually have extra to do with short-term efficiency than fundamentals.
Plan accordingly.
Michael and I talked about company earnings, small caps, the inventory market and extra on this week’s Animal Spirits video:
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1The rationale you don’t see 2008 on this chart is as a result of earnings fell practically 80% that yr. We needed to cap the axis on the chart to make it simpler to learn. So 2008 is included within the whole, you simply can’t see the dot. Similar factor with 2009 on the upside when earnings grew greater than 200%.
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