16 January 2026
Understanding what drives asset returns is central to investment decision‑making. In “What Earnings Explain - and What They Don’t: Insights from 150 Years of Market Data,” CFA Institute highlights landmark research showing how corporate earnings relate to stock market returns — and why investors must avoid over‑reliance on earnings alone. This historical perspective, spanning more than a century of data, reinforces that while earnings matter, valuations and other market forces are often equally, if not more, influential.
Earnings: the traditional bedrock of valuation
For decades, analysts and portfolio managers have used corporate earnings as the cornerstone of valuation models. Earnings per share (EPS) and earnings growth are foundational inputs in discounted cash flow (DCF) models, dividend discount models, and other valuation techniques. Historically, earnings growth has indeed correlated with long‑term market performance, reflecting the fundamental capacity of companies to generate profits, reinvest in growth and reward shareholders.
However, the blog post underscores an important nuance: earnings trends alone do not fully explain equity price changes, particularly over shorter periods, in different markets, or during times of macroeconomic stress.
Valuation changes often drive returns
Historical data spanning 150 years shows that changes in valuation — such as price‑to‑earnings (P/E) multiples — often play a dominant role in explaining total stock market returns, especially over multi‑year horizons. For example, rising valuations (multiple expansion) during periods of investor optimism, low interest rates or aggressive monetary policy can boost prices even when earnings growth is flat. Conversely, contracting valuations in periods of risk aversion or tightening financial conditions can depress prices even as earnings rise.
This dynamic highlights a critical insight: valuation shifts — reflecting investor sentiment, liquidity conditions, and macro trends — can matter at least as much as earnings in explaining return patterns. In practice, this means that two periods with similar earnings growth can produce very different market outcomes depending on how valuations evolve.
Earnings vs. Price: correlation varies through time
The article further illustrates that the statistical correlation between earnings and price changes fluctuates considerably across market environments and eras. In certain periods — such as prolonged expansions — earnings growth aligns more closely with rising prices. In other times — such as major financial crises or secular valuation shifts (e.g., tech bubble, tightening cycles) — price movements diverge markedly from underlying earnings trends.
This divergence underscores the limits of earnings as a standalone predictor and reinforces the need for a more holistic approach to return attribution.
Why this matters for investors
For investment professionals — especially those focused on equity valuation and portfolio construction — these long‑term insights offer several practical takeaways:
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Valuation matters: Price/earnings multiples, risk premia, liquidity conditions and macro variables often drive returns independently of earnings growth. Investors must monitor valuation trends as closely as they track earnings.
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Risk Management: During periods when valuations are stretched, even solid earnings growth may not translate into strong returns. Risk frameworks should incorporate valuation risk alongside fundamental analysis.
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Market narratives matter: Investor sentiment, policy shifts, liquidity conditions and macro shocks can alter valuations rapidly. A broader analytical lens helps distinguish noise from structural drivers.
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Forward‑looking context: Earnings data is inherently backward‑looking, whereas valuation adjustments often reflect forward expectations. Combining forward projections with historical context can enhance investment decisions.
Conclusion
The insights from 150 years of market data remind investors that earnings growth — while essential — does not tell the full story of market returns. Valuation dynamics, investor psychology, macroeconomic regimes and policy actions can amplify or mute the effects of earnings trends. For CFA Society Italy members and investment professionals more broadly, this underscores the importance of an integrated analytical framework — one that blends fundamental analysis with valuation vigilance and macroeconomic awareness to navigate complex market cycles.