Earnings Drive Both Bull and Bear Markets

Elite Academy Desk — here is a clear take on the latest market development for traders following the story.

“Earnings drive market outcomes. In 151 years, every single 20% market decline was accompanied by a double-digit earnings decline, with zero exceptions.” Every few months, a new reason to sell arrives. Capital spending is too high. The deficit is unsustainable. Oil just broke out. The conclusion attached to each is always the same: market participants are about to lose half their money. I’ve watched that warning recycle for three decades, and it’s a smoke detector that goes off every time somebody makes toast. What actually matters is far less exciting. Earnings drive market corrections , and the historical record on that is close to airtight. A probability tree from BCA Research has been circulating that makes the point simply. It shows the S&P 500 rising 84% of the time overall, and only 64% of the time in years when earnings fall. The framing is right. The specific numbers, when I rebuilt them from scratch, turned out to be a good deal more interesting than the chart suggested. Start with why the popular scare stories fail as timing tools. Capital spending, government deficits, and energy prices are all real economic variables. None of them repriced the market on their own. If earnings drive market corrections, then every one of these stories has to travel through profits before it can do any damage, and most of them never complete the trip. The reason is mechanical. A stock is a claim on future cash flows, and its price is that claim divided by a discount rate. So there are exactly two ways to knock the market down hard. Either the expected cash flows fall or the discount rate rises. That’s the whole list. Capex, deficits, and oil only matter to the extent they eventually show up inside one of those two variables, and most of the time they don’t show up in either with enough force to matter. Consider what that means in practice. Hyperscaler capital spending can run at what looks like a reckless pace for years without producing a bear market, because the spending itself is a transfer from cash flow to depreciation schedules rather than a destruction of earning power, and the market will happily fund that trade for as long as revenue keeps validating it. The spending isn’t the risk. The risk is that the moment revenue stops validating it, it becomes an earnings problem wearing a capex costume. I made a version of this argument in AI Capex Depreciation Risk Is The Catch To Record Earnings , where the concern isn’t the capex line but the impact deferred costs have on noted profits later. Deficits work the same way, of course. They can widen for a decade, and the only reliable transmission into equity prices runs through interest rates, which is the discount-rate channel rather than the earnings channel. Oil, in contrast, is the most direct of the three, because energy is an input cost that compresses margins. Even there, the market doesn’t fall when oil rises. It falls when the margin compression shows up in guidance. Rather than take anyone’s chart on faith, I rebuilt the analysis from Robert Shiller’s monthly S&P 500 dataset, which carries index price, dividends, and trailing noted earnings per share back to the nineteenth century. That yields 151 complete calendar years, from 1872 through 2022, where both an annual total return and a year-over-year change in noted earnings can be computed. noted earnings, not operating earnings, and certainly not forward estimates. Actual bottom-line profits. Here’s what the conditional probabilities look like. Two things stand out. The unconditional hit rate is 74%, not 84%. That figure cross-checks cleanly against Aswath Damodaran’s independent dataset at NYU Stern, which records 71 positive years out of 97 from 1928 through 2024, or roughly 73%. 1 The 84% figure only appears if you start the sample in the mid-1980s, which conveniently excludes the Depression, the 1970s, and both world wars. The second finding is the one that should give a strategist pause. In years when earnings fell, the market still rose 66% of the time, which is close to BCA’s 64%. But in years when earnings rose , the market rose only 79% of the time, not 92%. Widen the sample and the gap between the two branches collapses from 28 percentage points to 13. Over the 1928 to 2022 subsample it shrinks to roughly three points. So does that kill the thesis? No. It relocates it. Up or down is the wrong ques