S&P Earnings Uplift Needed to Offset Interest Rate Effect

The S&P needs more earnings to compensate for less favourable interest rate effects. The estimate for June quarter S&P500 earnings (shown in the red marker in the chart) is 9.6% higher than operating earnings in the March quarter and 3.6% lower than earnings in the 2014 June quarter. The responsiveness of the market to changes in earnings varies through the cycle; hence the non-linear trend line showing the relationship between quarterly earnings outcomes and the S&P500 share price index since 1988. Whatever their impact, rising earnings have been a necessary condition for a rising market. The broader macroeconomic environment and, in particular, the beneficial valuation effects of lower interest rates has compensated for the backward step in earnings over the past year. The relatively modest future earnings uplift implied by currently expected December quarter 2015 earnings shown by the green marker would be consistent with further market gains provided a favourable market environment persists. That may not happen if bond yields have stopped falling and the Federal Reserve begins pushing interest rates to more normal levels.