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Joined Nov 11, 2007
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Equity Prices and Earnings Disconnect, Substantial Correction Could Be Upon Us

“While earnings have grown only modestly over the past few quarters, stock prices have surged, sending what could be a disconcerting message to investors.

The Dow industrials, in particular, have seen a 17 percent jump in 2013 alone even as earnings in the past two quarters have grown little.

That trend disrupted a formerly symbiotic relationship between earnings and stock prices and is indicating that the bluechip average is in for a substantial pullback, according to Tom Kee, who runs the StockTradersDaily investor web site.

“They’ve been moving in tandem since 2009, until recently. Earnings per share for the Dow Jones industrial average have flatlined and the price has taken off,” Kee said. “There is something happening here that defines a bubble.”

After being stuck at $19.17 a share in early 2009, Dow earnings jumped to a peak of $36.15 in 2012.

But they’ve stayed in that range over the past two quarters, hovering around $35 and most recently at $34.84 in the first quarter.

A similar situation has happened on the Standard & Poor’s 500, which saw first-quarter earnings increase 5.1 percent on revenue growth of just 1.1 percent.

At one point not long ago, earnings for S&P 500 and the price surge from the 2009 lows were nearly identical, but that relationship also has begun breaking down….”

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