Understanding the trajectory of corporate earnings is crucial for investors, as these earnings significantly influence stock valuations and market performance. Economic indicators such asIndex provide valuable insights into the economic environment that shapes company profitability. These indicators can also help investors evaluate whether Wall Street’s earnings estimates are realistic.
That close relationship in growth rates should be logical, particularly given the significant role that consumer spending has in the GDP equation.”A better way to visualize this data is to look at the correlation between the annual change in earnings growth and inflation-adjusted GDP. There are periods when earnings deviate from underlying economic activity. However, those periods are due to pre- or post-recession earnings fluctuations.
As shown, corporate earnings growth, which correlates with economic indicators like the ISM Manufacturing index, suggests some caution in the more optimistic Wall Street estimates. However, even if we include theside of the index, which comprises the bulk of economic growth, and weight it accordingly, we see that the stock market has far outpaced underlying economic activity.
The CFNAI’s broad scope provides a nuanced view of how various economic forces combine to affect corporate earnings. With production and employment metrics deteriorating, the outlook for robust earnings in 2025 appears increasingly strained. As shown, there is a high but volatile historical correlation between the CFNAI and corporate earnings.: This accounts for nearly 70% of U.S. GDP.