Does the economy have to be booming for corporate earnings to grow? No. Not necessarily. But history suggests manufacturing conditions tend to matter more than many investors realize.
For example, this week’s chart tracks the Institute for Supply Management (ISM) Prices Index, a measure of price pressures and activity within the manufacturing sector. Readings above 50 generally indicate expansion, while readings below 50 point to contraction.
The top panel shows S&P 500 earnings per share over time.
What you immediately notice is how closely the two have tended to move together. Historically, when the ISM Prices Index has been above 50, S&P 500 earnings have grown at an annualized rate of 16.0%. When the index has been 50 or below, earnings have declined at an annualized rate of 19.9%.
As you can see, after spending much of the last two years below that key threshold, the ISM has recently moved back into expansion territory. The latest reading of 73 is well above 50.
The bottom line? The ISM’s turnaround suggests that U.S. consumers are resilient and could prop up this bull market for a while longer.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.