This week’s chart reminded me of my second-year economics class at the University of Calgary approximately 25 years ago where the professor was lecturing on short versus long run economic impacts. His quote was, “in the short run, anything can happen and, in the long run, we’re all dead.” At the time, I wasn’t sure if this was an attempt at humour or him trying to get the class’s attention. Later, I discovered his lecture was loosely based on a famous quote from the economist John Maynard Keynes, “the long run is a misleading guide to current affairs. In the long run, we are all dead.”
Shifting from economics to stock market performance, almost any result can occur over the short term, however, longer term market performance is primarily driven by the direction of earnings. Stock markets like the S&P 500 and the S&P TSX are a market of stocks. This means their performance is based on the performance of individual stocks included in that index.
The S&P 500, for example, is comprised of 500 of the largest publicly traded companies in the U.S. and, because it is a market capitalization-weighted index, the largest companies like Apple, Google, Microsoft, Nvidia, etc. have a significant impact on the performance of the overall index. A recent example of why it’s important to have a longer-term perspective when it comes to investing in stocks is the sell-off experienced this past April due to the Trump Administration’s implementation of tariffs beyond what the market was expecting.
The market sell-off proved to be short-lived because tariffs were relaxed and, more importantly, because tariffs haven’t changed the direction of earnings growth.
This week’s chart depicts the combined earnings growth of all companies which comprise the S&P 500 going back to 1995 with a solid blue line and grey bars representing recessions (2001, 2008 & 2020). Notice the blue line turns negative (earnings shrinking versus growing) during each recession.
The red-dotted line represents our proprietary econometric model which has a solid track record of predicting the direction of earnings growth. This model is based on economic signals such as interest rates, the value of the U.S. Dollar and global GDP growth.
Notice the model (red-dotted line) is predicting further growth in earnings 12 months forward based on current economic conditions (central banks cutting interest rates, solid global GDP growth, etc.).
The bottom line is, keep your eyes on the prize – earnings growth. If earnings continue to grow, led by artificial intelligence which is creating significant productivity gains throughout the economy, further market gains are likely.
This doesn’t mean you shouldn’t pay attention to headlines or current events; it just means market corrections created by negative headlines are typically buying opportunities, provided earnings growth remains positive.
Eric Van Enk is a wealth adviser & associate portfolio manager with National Bank Financial in Medicine Hat. He is a graduate of the University of Calgary, as well as a CFA charter holder with 20 years of financial markets experience in New York, Toronto and Calgary. He can be reached at eric.vanenk@nbc.ca
As a former member of the Royal Bank for 32 years, working in 16 branches throughout the province, and being a manager of 7 of them I certainly agree with Eric .
There is no question in my mind that Albertans have allowed themselves to be treated like morons by these phoney conservatives ,Reformers ,and we have lost $1.2 trillion because of them, and our children must face an enormous financial mess in the future along with Global Warming that’s destroying this planet.
As a former member of the Royal Bank for 32 years, working in 16 branches throughout the province, and being a manager of 7 of them I certainly agree with Eric .
There is no question in my mind that Albertans have allowed themselves to be treated like morons by these phoney conservatives ,Reformers ,and we have lost $1.2 trillion because of them, and our children must face an enormous financial mess in the future along with Global Warming that’s destroying this planet.