Corporate earnings are one of the most important indicators of economic health. Collectively, they provide a glimpse into the overall productivity of the private sector—the largest component of the economy that produces goods and services. In a very simplified way, earnings are company revenues minus company expenses. This provides a measure of how much profit a company is making and, when compared to stock prices, gives investors an idea of a stock’s relative value. Earnings also help guide central bank policy decisions such as interest rate changes and monetary stimulus.
For these reasons, it’s no surprise that EPS is closely watched by investors and analysts. Although the details of calculating earnings can get complicated, the basic formula is simple: net income divided by shares outstanding. Other more specific terms, like operating income and earnings before interest and taxes, are sometimes used. However, EPS remains the most widely reported metric when discussing financial performance and can provide valuable insight into a company’s long-term growth potential.
As earnings season wraps up, consensus estimates indicate that 2023 earnings-per-share will continue to grow on a year-over-year basis for large cap stocks. That said, earnings are expected to slow down for mid and small caps. As a result, those companies will likely see lower stock prices in the near future. However, it’s important to remember that economic trends, not individual earnings reports, drive stock prices in the long run. Therefore, it’s vital to monitor leading indicators such as unemployment claims, housing permits, purchasing managers’ index for manufacturing, retail sales, durable goods orders, consumer confidence and the yield curve.
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