Sunday, January 9, 2011

Wall Street | Earnings Drive Stock Prices

Since the time of buttonwood trees, Wall Street has had its own version of the Ten Commandments -- the cornerstone principles of conventional economic wisdom. The first of these writ-in-stone notions is the widespread belief that earnings drive the stock market.

By this line of reasoning, knowing where a market's prices will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. On this, the recent news items below capture the public's devoted following of earnings data:

* "Stocks Rebound As Investors Await Earnings." (Associated Press)
* "US Stocks Drop As Earnings Data Fall Short" (MarketWatch)
* "Sideways Market Looks For Direction: Earnings Could Point The Way" (MarketWatch)

In reality, though, much of this belief is based on faith, not facts. While earnings may play a role in the price of an individual stock, the stock market as a whole marches to a different drummer.