Earnings Ascendancy: The New Vanguard of Market Growth

In the ever-evolving landscape of the stock market, focus has frequently shifted between interest rates, inflationary patterns, and market valuations. However, as we move into an era of adaptability to higher rates and moderated inflation, the spotlight is turning towards earnings. Portfolio Manager Jeremiah Buckley holds the view that earnings will be the pivotal factor for market growth.

Dissolving Myths: Rate vs. Valuation Correlation

The conventional wisdom purports that higher rates usually suppress market valuations. Yet, is this relationship as strong as we think? A critical observation indicates that even amid significantly heightened rates, we’ve witnessed multiple expansions this year. It’s worth noting, though, that these expansions have been propelled by a limited number of stocks.

The actual correlation between rates and market valuation can be gauged by looking back at the last 25 years of U.S. equity market behavior. Historical data shows that the P/E multiple on the S&P 500® Index often stays within the mid to high teens, irrespective of the federal funds rate being nearly zero or even rising to the 4%-5% mark.

Elevated interest rates can undoubtedly affect consumer and corporate demand. Still, our adjusted earnings forecasts for 2023 and 2024, reflecting these rate hikes, suggest equity multiples remain well within their historical parameters.

S&P 500 P/E, S&P 500 dividend yield, and Federal Funds Effective Rate
S&P 500 P/E, S&P 500 dividend yield, and Federal Funds Effective Rate
Source: Bloomberg,as at 16 August 2023. Data from 1 January 1998 to 16 August 2023.

The Engine of Growth: Earnings

While 2023 has seen market dominance by a select few tech giants, especially those poised to capitalize on AI, the real market mover in the forthcoming period is projected to be earnings growth.

Companies are aggressively gravitating towards productivity. This move is largely orchestrated by burgeoning investments in technology, especially AI, which is anticipated to streamline corporate expenses. The labor market’s health, an uptick in labor force participation, the normalization of supply chains, and the reduced costs of material inputs also underscore the potential for a robust earnings-driven market.

Yet, the journey ahead is not without its bumps. The economic terrain might get volatile, but the bullish sentiment regarding earnings growth remains unshaken. If a recession looms, it will be one of the most foreseen in history. The good news is that central banks hold ample ammunition to reinvigorate growth, if required.

The Hallmark of Success: Quality

With the tides of the market becoming increasingly intricate, the companies that stand out are those fortified with secular growth advantages. In such a climate, emphasizing high-quality companies is paramount. These entities, characterized by formidable capital structures and justified pricing power, are poised to lead the pack.

A robust balance sheet, consistent cash flows, and the ability to deliver value consistently set these companies apart. They possess the unique ability to adjust prices in response to inflationary pressures, ensuring profitability remains undeterred.


In the stock market’s complex matrix, while rates and valuations have their place, the emphasis is shifting. The true drivers of market performance are quality companies that can harness their strength in earnings. As we brace ourselves for the future, understanding and capitalizing on this perspective might just be the key to unlocking substantial growth.

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