Educate Yourself - It's Still About Earnings

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

Much has been written recently about the market's woes as a result of investors losing confidence in Wall Street and corporate America.

While I don't want to dismiss such concerns, I'm here to tell you that what really ails stocks isn't so much some crooked executives as it is weak bottom lines.

You see, at the end of the day, stocks are driven by three engines - interest rates, inflation, and corporate profits. And two of those engines - interest rates and inflation - are in good shape.

Which leaves corporate profits as the major culprit for the market's woes.

Sure, you can point to other factors that influence stock prices, but those factors influence primarily short-term movements.

That is what is happening today with this hullabaloo about corporate governance. This is a short-term factor that is hurting stocks, but I don't believe its impact will be lasting.

The more significant problem for stocks, however, is that corporate profits are still relatively lackluster.

Fortunately, that should change a bit in the second half of the year. In fact, corporate profits are already on the mend, just not as fast as most investors would like.

Bottom line: It is still corporate profits that matter the most to stock prices. When profits improve - and they will in the second half of this year - so will stock prices. It's as simple as that.

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