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Why Earnings No Longer Matter

Ian Wyatt

Last month we told you “Why Earnings No Longer Matter.” Today we have further proof.

Second-quarter earnings season has come to an end, and as Yahoo! Finance reported a few hours ago, it was the worst reporting season in more than three years.

Of the 2,300 companies that have reported earnings over the last month-plus, only 58% of them beat estimates – the lowest tally since the first quarter of 2009.

Nevertheless, weak earnings have not translated to plummeting stocks. On the contrary, in fact.

Since Alcoa (NYSE: AA) unofficially kicked off earnings season on July 9, the S&P 500 has gained 3.7%. It’s simply the latest evidence that earnings and market direction are no longer correlated.

We saw this in the first quarter, only in reverse.

Seventy-five percent of companies that reported earnings in the first quarter beat analyst estimates. And yet from April 10 through May 18 – when basically every major company reported earnings – the S&P declined more than 6%. The Nasdaq fell even further, with a 9% drop.

The declining relevance of earnings season is a result of several factors. One of them is that investors seem to be more concerned with economic data – both in the U.S. and Europe – than individual earnings reports.

If the unemployment rate just rose again or another euro-zone nation requires a bailout, then a round of positive earnings reports don’t mean as much. On the other hand, if the Fed indicates it’s moving closer to QE3 or the European Central Bank pledges widespread financial aid, then the market can easily shrug off a few earnings misses.

So remember that next earnings season. Don’t panic if a series of big-name companies miss earnings estimates. Stocks may go up anyway.