US companies reported stellar first-quarter profits this year. But some investors suspect that earnings growth has plateaued. Our research suggests that slowing earnings growth means nothing for stock prices.
As earnings season draws to a close, the results look pretty spectacular. US companies posted earnings growth of 26%, with 91% of S&P 500 companies reporting as of May 10. Until last week, stock prices ignored the strong results.
Earnings Growth: A Red Herring
Investors may be worried that earnings growth has reached a crest. We think that’s a red herring. Our research shows that after three previous peaks in the US earnings growth rate since 1994, stocks continued to rise for several years (Display above). That’s because even when the rate of earnings growth slows, the absolute level of corporate profits typically continues to rise for a long time. In fact, when earnings growth was less than 10% a year, the S&P 500 still returned 9.4% a year on average (Display below).