It's All About The Earnings
by Charles B. Carlson, CFA
Dow Theory Forecasts

Over the short run, lots of things can affect stock prices - monthly economic data, investor cynicism toward corporate America, accounting shenanigans, etc. Over the long run, however, only three things truly matter to stock prices - interest rates, inflation, and corporate earnings. These are the ultimate drivers of stock prices.

Now, market experts are giving a bunch of reasons for the market's malaise over the last few years. But at the heart of the problem has been one thing, and one thing only - corporate earnings. Profits basically tanked from levels of the late 1990s - especially in such previously hot areas as technology and health care - and that is what has led to a similar tanking in stock prices.

The reason I mention all of this is quite simple. There remains a lot of noise out there when it comes to the stock market. And it is easy to get caught up in the noise and forget what truly matters to stock prices.

Bottom line: With inflation and interest rates at low levels, all this market needs is improvement in corporate profits.

If corporate profits can manage to continue to show their steady (albeit slow) upward progress, the market should respond in kind. If corporate profits, however, fail to get jump-started, this market will remain in the doldrums.

Thus, next time someone tries to sell you on this market being dependent on what happens in the Middle East or what happens in the polling booths in November, block out the noise.

It's all about earnings.Period.

So where do I think earnings are heading? Actually, I'm reasonably bullish about corporate earnings, especially in the fourth quarter. Thus, I'm reasonably bullish on the stock market and expect the Dow to finish the year nicely above its current level.

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