Long-Term Market Drivers
While concerns surrounding the upcoming election and its potential market impact are understandable, the reality is that uncertainty around the outcome makes it difficult to predict any short-term effects. We’ve covered election cycles, congressional shifts, and their market implications in prior market updates, newsletters, and on our podcast. This time, we want to focus on a more enduring driver of stock market returns: corporate earnings.
Earnings Projections and Election-Year Context
Current Wall Street consensus estimates project earnings growth of approximately 10% in 2024 and 13% in 2025. If realized, 2024 will mark the strongest earnings growth for an election year since 2004, when earnings grew by 24%.
Since 1964, there have only been six election years in which earnings growth exceeded 10% (1964, 1972, 1976, 1984, 1988, and 2004). On average, earnings growth during election years has been 9.1%, compared to an average of 8.1% for all years during this period.
Interestingly, the year following elections tends to show even stronger earnings growth, averaging 10.9%. Notably, only two post-election years saw negative earnings growth: 2001 (due to the dot-com bubble) and 1985 (following an economic slowdown). This pattern supports the theory that new pro-growth policies are typically implemented the year after an election. Both major candidates in the upcoming election are proposing policies, such as spending initiatives or tax cuts, aimed at stimulating growth.
Why Earnings Matter to Long-Term Market Performance
Over the long term, earnings growth is a critical driver of stock market returns. From 1964 to 2023, corporate earnings grew by 5,220%, while the S&P 500 delivered a total return of 6,258%. The difference between these figures reflects the contribution of dividends and changes in valuation. During this 60-year period, 78% of years (47 out of 60) saw positive earnings growth, reinforcing the importance of earnings as a consistent market driver.
However, positive earnings don’t always guarantee positive market returns. In 12 years during this period, the market posted negative returns despite earnings growth, though in these cases, the average earnings increase was only 3%.
Current Economic Backdrop and Risks
While future earnings estimates are never a certainty, the current economic landscape is relatively favorable. Inflation appears to be stabilizing, and consumers remain in good financial shape, supported by strong balance sheets and positive labor market trends.
That said, avoiding a recession will be key. Historically, earnings decline by an average of 17% during recessions, accompanied by a 36% peak-to-trough decline in the stock market.
How Earnings Grow and What We Focus On
Earnings grow when companies:
Increase market share
Expand into new markets
Innovate with new products and services
Enhance efficiency
Leverage economic growth
At LVM, we focus on identifying companies with these qualities, while ensuring we pay a reasonable price to reduce risk during inevitable market downturns. By staying disciplined and concentrating on these fundamentals, we aim to help investors achieve the returns they need to meet their long-term financial goals.