Earnings Don’t Matter!

Here we are in the midst of a very important earnings season and I am the first to say that I can’t believe I am saying that earnings do not matter! From the day that the market started trading, earnings were always the major factor in stock evaluation. Earnings per Share (EPS) and Price Earnings Ratio (PE) have been two of the most popular and most used gauges of a company’s stock price and both stress the importance of earnings. That is how it always was but not anymore. Wall Street has been able to convince investors that a company does not actually have to improve or increase their earnings but just to do better than predetermined estimates.  That better than the estimates is determined by a preselected judge (Wall Street itself) with a separate agenda. You don’t have to be Einstein to know that it is in Wall Street’s best interest to make stocks look as attractive to investors as possible in order for them to move out their inventory at a profit. So, Wall Street uses these estimates to control your opinion on stock valuations by always making them look attractive. This has been going on for a while now and should come as no surprise to anyone. But things have changed even from there. Now, forward guidance seems to have become more important than earnings. What the company says about what they think will happen next quarter trumps the performance of the company for the last quarter. When you combine forward guidance and Wall Street estimates, you have gone pretty far toward making earnings pretty insignificant. Again, this is not necessarily a new thing. There have been recent articles that show that the market has diverged from the economy and earnings and how that fact has led to historically poor performances from the hedge funds this year. But the fact is that there is an even bigger reason why the divergence has occurred……government intervention. No matter how bad the earnings are and no matter how bad the forward guidance is, the market will not go down because the Fed will not let it. They will continue to pump money into the economy through whatever means possible. This lone factor has confused and stymied the “smart money” hedge fund managers all year. Their natural instincts force them to take notice of company earnings and macroscopically, the overall economy. Over the past several months, the economy has seen negative news and earnings estimates have been slashed repeatedly and the fund managers know that means trouble for the market. Unlike me, however, they just don’t know that today, it just doesn’t matter!



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