Why Earnings are Important to Bull Markets

The rally this week to the best level in months for the S&P 500 has been led by better than expected earnings reports out of a large number of influential companies. Yesterday Intel ($INTC) beat estimates and the stock rallied over 3%. Last night after the bell Ebay ($EBAY) also beat and is up over 5% in pre-market trading.

With all the talk about earnings expectations being too high and the fear of the global economy slowing, corporations continue to surprise to the upside.

There are two important lessons to take from the situation.

• There is a major disconnect between the economic headlines and the stock market. What this means is that if you only read the paper or the internet you would be convinced the stock market has been getting crushed the last couple of years. Where in reality the stock market has more than doubled from the 2009 low.

• Earnings are important. Investors buy a company based on the earnings and expected earnings. If the S&P 500 companies can report earnings of $105/share for 2012 (it looks like they will and possibly beat that number), it suggests the index should be at an all-time high above 1600 if it were to trade at its average valuation.

Earnings are just one reason I remain bullish on stocks.