Where are the Earnings?

The recovery rally in markets around the world, since the lows last March, has been technically-driven and not a result of earnings growth. It has been a case of the market adjusting for less-bad than expected.

What now?

For the next up-leg of the market we need to see earnings growth as Paul Lim explains in the New York Times. He says:

IN the first leg of a bull market, when optimism and euphoria are ascendant, investors are willing to bet that the economy will improve and that corporate profit growth is just around the corner. This faith manifests itself not just in rising share prices, but also in rising price-to-earnings ratios.

But hope can take the market only so far. Earnings — the “E” in the P/E ratio — must soon recover and become the catalyst for rising prices if this rally is to last. All reports so far, however, show that earnings are still falling.

It may very well be that, with the rapid rise in markets, we are now a bit ahead our ourselves here, as we may need earnings to catch up to the market.

A digestion period should not come as a suprise.

Read more here.

This entry was posted on 29. November 2009 at 15:40 and is filed under Markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.