Keeping in mind the fact it is only over longer time periods that we see persistent correlation between earnings and share prices. Once you shrink the period under examination to three years and especially to one year of less the correlations shrink and often go negative.*
Lifted in toto from Bloomberg, December 12:
US stocks will scale new records next year on higher earnings as artificial intelligence is more widely adopted and economic growth remains resilient, according to Goldman Sachs Group Inc. strategists.
The team led by Ben Snider expects earnings-per-share at S&P 500 companies to jump 12% next year and 10% in 2027. Of that, AI-driven productivity gains will contribute about 0.4% and 1.5%, respectively.
“The process of AI adoption remains early, but large companies report more progress so far than smaller firms,” the strategist wrote in a note. “We expect a combination of healthy nominal top-line growth, a fading drag from tariffs, and continued earnings strength for the largest stocks in the index.”
Snider, who is replacing David Kostin as chief US equity strategist at the end of the year, reiterated his target for the S&P 500 to trade around 7,600 points next year, implying gains of 10% from current levels.
Other market forecasters as well as asset managers also share that optimism. Strategists at teams including Morgan Stanley, Deutsche Bank AG and RBC Capital Markets LLC have called for US stocks to jump more than 10% in 2026.
Meanwhile, an informal Bloomberg survey found global money managers are betting on the rally to continue, as confidence in the economic outlook drives the S&P 500 to fresh records. Still, there are lingering concerns that massive spending on AI may be leading to a bubble in the technology heavyweights.
READ: What Bubble? Asset Managers in Risk-On Mode Stick With Stocks
Goldman’s Snider said the tech cohort will continue to be a key driver of overall earnings next year. The strategist expects the biggest S&P 500 stocks by market cap — Nvidia Corp., Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Broadcom Inc. and Meta Platforms Inc. — to make up about 46% of the index’s profit growth in 2026, only slightly below their contribution this year.
Analysts tracked by Bloomberg Intelligence expect net income at S&P 500 companies to jump 14% in 2026, driven by an 18% increase at the Magnificent Seven.
Bloomberg home.
*There are hundreds, maybe thousands, of studies on the relationship between earnings and share prices. Here's one that was near the top of the link-vault.
From the CFA Institute's Enterprising Investor blog, 22 March 2021:
Myth-Busting: Earnings Don’t Matter Much for Stock Returns
Introduction
What drives stock returns? Earnings, right? So, what drives earnings? Likely economic growth. After all, it’s much harder for companies to expand their sales and profits in a sputtering economy.
However, the relationship between equity returns and economic growth is more illusion than reality. It may make logical sense, but there is little actual data to support it.For example, China’s economy has expanded at a pretty consistent and impressive pace, about 10% per year, since 1990. That should have provided ideal conditions for Chinese stocks to flourish and generate attractive returns. But investing in Chinese equities was not such a smooth ride. The Shanghai Composite index is up since 1990, but the trajectory has been anything but consistent, with multiple 50% drawdowns.
This lack of correlation has a simple explanation. The Chinese stock market has been historically dominated by largely unprofitable state-owned enterprises (SOEs) and has not reflected the otherwise highly dynamic economy.
But China is hardly an outlier. Elroy Dimson, Jay R. Ritter, and other researchers have demonstrated that the relationship between economic growth and stock returns was weak, if not negative, almost everywhere. They studied developed and emerging markets across the entire 20th century and provide evidence that is difficult to refute.
Their results suggest that the connection so often made between economic developments and stock market movements by stock analysts, fund managers, and the financial media is largely erroneous.
But what about earnings driving stock returns? Does that relationship still hold true? After all, Finance 101 teaches that a company’s valuation represents its discounted future cash flows. So let’s see if we can at least validate that connection.
Earnings vs. Stock Returns
To explore the relationship between US stock market returns and earnings growth, we first calculated the five-year rolling returns of both time series using data from Robert J. Shiller at Yale University going back more than a century. From 1904 to 2020, earnings growth and stock returns moved in tandem over certain time periods, however, there were decades when they completely diverged, as highlighted by a low correlation of 0.2.The perspective does not change if we switch the rolling return calculation window to one or 10 years, or if we use real rather than nominal stock market prices and earnings. The correlation between US stock market returns and earnings growth was essentially zero over the last century.
US Stock Returns and Earnings: Five-Year Rolling Returns
Earnings growth was winsorized at 350%.
Perhaps the lack of correlation between stock returns and earnings growth is because investors focus on expected rather than current growth. Valuing a company is based on discounting future cash flows after all.
We tested this hypothesis by focusing on earnings growth for the next 12 months and assume investors are perfect forecasters of the earnings of US stocks. We treat them as superinvestors.
But knowing the earnings growth rate in advance would not have helped these superinvestors time the stock market. Returns were only negative in the worst decile of forward earnings growth percentiles. Otherwise, whether the earnings growth rate was positive or negative had little bearing on stock returns.
US Stocks Returns: Next 12 Months Earnings Growth vs. Stocks Returns, 1900–2020
Earnings growth was winsorized at 100%.
Earnings Growth vs. P/E Ratios
We can extend this analysis by investigating the relationship between earnings growth and P/E ratios. Rationally, there should be a strong positive correlation as investors reward high-growth stocks with high multiples and penalize low-growth stocks with low ones. Growth investors have repeated this mantra to explain the extreme valuations of technology stocks like Amazon or Netflix.Again, the data does not support such a relationship. The average P/E ratio was indifferent to the expected earnings growth rate over the next 12 months. Indeed, the higher forward growth resulted in P/E multiples slightly below the average....
....MUCH MORE
And just to make things even more interesting, here's the intro to July 2025's "Can the Developed World Grow Its Way Out of Stagnation?":
I sure hope so because that appears to be the only option left.
And it also appears that debt-fueled growth is the path that both the U.S. and Germany have chosen.
Past is not prologue but it is the only guide we have. And unfortunately we only have one time and price series. Someday it will all end, it may be tomorrow, it may be in a couple hundred years as stasis and/or entropy and/or civilizational catastrophe makes its mark.
Here's our boilerplate intro to extrapolating the past into the future:
"Industrial Revolution Comparisons Aren't Comforting"Partly because of Eddington's Arrow of Time, at least in the mundane everyday experience, we only have one economic history dataset to work with. Because of this I used to argue with people who said this time will be like the last time but found that approach neither satisfying nor enlightening. I don't argue anymore, I just observe, like a kid watching a bug and wonder where the almost metaphysical certitude would be coming from, because, truth be told, nobody knows how this all works out....
....Again, we only have one dataset. We can say that U.S. stocks have returned 'X' over 'Y' time period, and for long periods we've been able to extrapolate those variables, but no one knows what tomorrow brings.Don't let your kids grow up to be risk managers....
The linked piece and a companion is worth a look. The companion is titled "AI is the whiff of perfume that's supposed to mask the stench of terminal moral decay."
Finally, for what it's worth, Professors Shiller and Dimson are two of our favorite students of the passing parade. If one is so inclined, a search of the blog (box, top left) can prove rewarding.
