I already put forth six reasons why this bull market could keep charging higher. And while those factors are still valid, it’s time to add one more powerful indicator to the mix for good measure: corporate profits.
You see, a company booking more and more profits each quarter is bound to benefit from a soaring stock price. And vice versa.
That’s why if you spend anytime around our offices – or reading our work – I guarantee you’ll get hit upside the head a few times with our hackneyed mantra: “Share prices ultimately follow earnings.”
Repeat it after me: “Share prices ultimately follow earnings… Share prices ultimately follow earnings… Share prices ultimately follow earnings.”
If that doesn’t brainwash you into belief, I encourage you to put this theory to test on your own. Or if you’re too darn lazy, just take the current bull market, which just turned two, as proof positive.
As earnings per share increased for the, guess what? Share prices followed earnings.
This chart, courtesy of Clusterstock and Citigroup’s chief U.S. equities strategist Tobias Levkovich says it all.
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Bottom line: if you’re curious where the market’s headed next, simply keep an eye on corporate profits. If they’re headed up, history dictates stock prices should quickly follow suit.
And in case you’re wondering, earnings for the companies in the S&P 500 are expected to jump 14% to about $905 billion in 2011. So don’t be surprised if – you guessed it – share prices follow suit.