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Myth-Busting: Earnings Don’t Matter Much for Stock Returns

If earnings don’t matter, what does then?

Nicolas Rabener
10 min read
22 Mar 2021

SUMMARY

  • There is no strong relationship between stock returns and earnings
  • This is regardless of current or expected earnings
  • High earnings growth does not lead to high P/E ratios

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.

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