Earnings season is underway. Right now, companies are reporting their results for the third quarter of 2017. And it’s set to be a historic event.
Earnings should reach a record high. Trailing 12-month earnings per share (EPS) measures earnings over the past 12 months. This quarter, analysts expect the companies in the S&P 500 to report record-breaking EPS.
Earnings suffered a bear market starting in 2014. EPS fell for three years and began recovering just six months ago. The chart below shows this.
(Source: S&P Capital IQ)
The chart also shows the last time earnings surpassed the previous high. Traders recognized how important that was, and prices soared.
Over the next four quarters, the S&P 500 delivered a total return of 26%.
Over the past year, the S&P 500 has already gained more than 20%. Skeptics argue another large gain is unlikely.
But the S&P 500 gained 13% in the four quarters before the last EPS record.
Earnings drive returns. As EPS approaches all-time highs, stocks should rally. In the past, after setting the new high, the rally has continued.
I’ll explain why in a future article, but the next recession is likely to start a year from now. There will be a bear market during that recession, probably around this time next year.
That means we should enjoy the rally in stocks for as long as it lasts.
