There’s a random quality to short-term stock market movements that can be revealed by breaking down returns into two parts: contributions from earnings and the change in the price-to-earnings ratio.

  • In any given month, precious little of the change in the stock market can be attributed to earnings.
  • Over a two-year time horizon, however, earnings fundamentals start to matter more than investor psychology.
  • But it’s not until we look at the market over a ten-year time frame that earnings become the primary driver of equity value.

Earnings vs. Valuations