{"id":3250,"date":"2015-02-04T12:55:24","date_gmt":"2015-02-04T07:25:24","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3250"},"modified":"2015-02-04T12:55:24","modified_gmt":"2015-02-04T07:25:24","slug":"do-company-earnings-drive-the-stock-market-or-is-it-something-else","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/02\/04\/do-company-earnings-drive-the-stock-market-or-is-it-something-else\/","title":{"rendered":"Do company earnings drive the stock market or is it something else?"},"content":{"rendered":"
<\/a>An interesting piece of analysis, which is carried out almost every time the quarterly results come out, caught my eye on January 26, 2015, in the Business Standard newspaper<\/a>. No meaningful relationship between Sensex returns
\nThe combined net profit (adjusted for exceptional items) of 290 companies which have declared their results for the period between October to December 2014, grew by just 2.2% in comparison to the same period last year.
\nInterestingly, this set of companies had declared a profit growth of 12.6% during the same period last year and 9.8% during the period July to September 2014, the newsreport points out.
\nWhen it comes to the growth in revenues of these companies the results are worse. The combined sales of the 290 companies which have declared results fell by 4.4% in comparison to the same period last year. This is the first drop in eight quarters.
\nIn fact, if banking and financial companies and IT exporters are taken out of this sample, the combined revenues fell by 11% in comparsion to the same period last year. The net profit fell by 4.8%.
\nThese are not great numbers at all. While, the sample size may not be big enough it is a cause for worry nonetheless. Further, the projection on revenues growth isn’t great either. Crisil Research in a recent report said that it expects revenue growth of India Inc to “slip to a 6-quarter low of 7% on a year-on-year (y-o-y) basis in the December 2014 quarter.” “Revenue growth was around 9% in the preceding quarter and 13% in the December 2013 quarter,” Crisil Research pointed out.
\nNevertheless, the stock market has continued to rally<\/a>. Financial theory tells us that stock prices are ultimately a reflection of discounted future earnings of a company. But that doesn’t seem to be the case here. If the stock market was expecting quarterly results to be bad then it should have been falling, as per theory. But that doesn’t seem to be happening.
\nHaving said that we are looking at data for just one quarter. How strong is the link between earnings growth and Sensex returns over the long term? Ambit Research has the answers in a recent research note titled <\/span><\/span>The Three ‘Stories’ That Drive the Sensex. <\/i><\/span><\/span>As can be seen from the following table there is”no meaningful relationship between Sensex returns and earnings per share growth between financial years 1992-2014.” <\/span><\/span><\/p>\n
\nand EPS growth between FY1992-2014<\/b><\/span><\/span><\/p>\n