by Bob Stokes
Updated: January 18, 2022
Only five stocks (Apple, Microsoft, Nvidia, Alphabet and Tesla) provided fully 51% of the S&P 500’s returns from April through approximately mid-December 2021.
About a month ago, the chief U.S. equity strategist for one of the most prestigious firms on Wall Street acknowledged this narrowing breadth and, in effect, said don’t worry about it. Here’s what he wrote (Reuters, Dec. 13):
“…risk of a major drawdown during coming months appears limited due to light positioning, strong earnings growth, and share prices already reflecting likely Fed tightening.”
On Jan. 13, the same equity strategist reiterated part of what he had discussed in December (CNBC):
[Chief U.S. equity strategist] says earnings will drive the market in 2022.
It’s a common belief that corporate earnings drive aggregate stock prices — but those who hold that belief may want to think twice.
This chart and commentary from Robert Prechter’s landmark book, The Socionomic Theory of Finance points out why:
… in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the S&P suffered its largest decline since 1937-1942. This is not a small departure from the expected relationship; it is a history-making departure. … Moreover, the S&P bottomed in early October 1974, and earnings per share then turned down for twelve straight months, just as the S&P turned up!
A more recent case-in-point is from the December 2009 Elliott Wave Financial Forecast.
…quarterly earnings reports announce a company’s achievements from the previous quarter. Trying to predict future stock price movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror.
You’ll notice on the chart that in Q4 2008, the S&P 500 had its first negative earnings quarter ever. According to conventional logic, stocks should have crashed afterwards.
Instead, a rally started in March 2009, which stretched all the way into early 2022.
If earnings (and other factors outside of the market) do not determine the trend of stock market prices, what does?
The answer is the Elliott wave model. Get important insights into what the Wave Principle is suggesting is next for U.S. stocks by following the link below.
That knowledge helps you anticipate big price moves in the direction of the main trend. And — just as important — you won’t be fooled by countertrend moves.
Remember, the stock market’s Elliott Wave pattern unfolds at ALL degrees of trend. Meaning — trends on an hourly chart are part of daily trends, which comprise weekly trends, which are part of monthly trends… and so on.
An investor who recognizes levels of trend can make sense of what is going on with the stock market.
See what our analysts see by following the link below.
Reset Your Thinking By Understanding True Market Dynamics
You start by receiving a copy of Robert Prechter’s groundbreaking book, The Socionomic Theory of Finance. Thirteen years in the making, STF exposes layers of flawed assumptions and offers you a new approach. The book is jaw-dropping and, at times, an uncomfortable read. STF uses history to painstakingly challenge beliefs. It shows what actually happens in the markets. It does so fearlessly, taking on even the most sacred of assumptions. The book is acclaimed by academics, practitioners and investors alike as a landmark paradigm-setter. It comes in print and online editions and sells for $99. We include it free with your Financial Forecast Service bundle.
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Your next step is to be sure to stay alert, on the lookout for danger and opportunity. The Financial Forecast Service equips you to do this.
All month long, FFS shows you the patterns in U.S. stock indexes, bonds, gold, silver, the U.S. dollar, as well as market psychology and cultural trends. We show you where the trend is now, and when prices should turn — specifically, we show the pattern at multiple degrees of trend, with precise risk/reward calculations. If you have fewer surprises, you can be better prepared.
Here’s how it works:
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At the end of each month, you get a 30-60 day look ahead at the markets. Elliott Wave Financial Forecast lays out expected trends and turns in stocks, gold, USD and bonds.
At market close every Monday, Wednesday, and Friday, you get the Short Term Update, alerting you to what’s changed and what’s upcoming in the next several days.
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Here’s Why This Grain Market Looked “A Lot Different” MORE Than a Week Ago!
Soymeal’s trend began to “look a lot different” before January 7th — in fact the trend began in October, as forecast in Daily Commodity Junctures. See it for yourself.
Stock Market Myth: Corporate Earnings Drive the Main Indexes
A prominent market observer expects higher stock prices in 2022 based on corporate earnings. However, do earnings determine the price direction of the main indexes? Financial history provides some insight.
The Myth of Shocks
Read Chapter 1 of Prechter’s Socionomic Theory of Finance.
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