Over the long term, stock market performance aligns closely with corporate earnings growth, rewarding investors who prioritise durable businesses capable of compounding value through economic cycles. This correlation, evident in historical data spanning decades, suggests that while short-term market fluctuations remain stubbornly unpredictable, sustained earnings expansion drives superior returns for patient capital allocation.
Historical Correlation Between Earnings and Stock Prices
Analysis of major indices reveals a strong link between earnings trajectories and price appreciation. For the S&P 500, annualised earnings per share (EPS) growth has averaged approximately 7% over the past century, closely mirroring total returns when adjusted for dividends and inflation. Data from 1928 to 2024 indicate that periods of robust EPS expansion, such as the post-World War II era through the 1960s, coincided with compound annual growth rates (CAGR) in the index exceeding 10%. Conversely, stagnation in earnings during the 1970s, amid high inflation and energy crises, resulted in flat real returns.
More recent figures underscore this pattern. From 2010 to 2024, S&P 500 EPS grew at a CAGR of 8.2%, contributing to a total return CAGR of 13.6% including dividends. This period encompassed the recovery from the global financial crisis and the acceleration driven by technology sectors. As of 27 July 2025, forward EPS estimates for the S&P 500 stand at USD 250 for 2025, implying a 6% year-over-year increase from 2024’s projected USD 236, according to aggregated analyst consensus. This projection aligns with market levels around 5,500, yielding a forward price-to-earnings (P/E) ratio of 22, which is elevated but seemingly supported by low interest rates and anticipated productivity gains from artificial intelligence.
To illustrate, consider the technology-heavy Nasdaq-100. Between 2000 and 2024, its EPS CAGR was 9.1%, outpacing the broader market and resulting in a price CAGR of 8.5%. Disruptions like the dot-com bust and the 2022 bear market temporarily decoupled prices from earnings, but reversion occurred as fundamentals reasserted their dominance.
Valuations and Long-Term Return Predictions
Valuation metrics further inform the earnings-price nexus. Research on U.S. equities shows a negative correlation between starting P/E ratios and subsequent 10-year returns. For the Russell 1000 Growth Index, an R-squared value of 0.41 indicates that higher initial valuations often precede lower returns, as growth stocks derive much of their value from future earnings susceptible to re-rating. In contrast, the Russell 1000 Value Index exhibits a weaker correlation (R-squared 0.23), reflecting the relative stability afforded by dividends and mature business models.
Small-cap equities, represented by the Russell 2000, display minimal predictive power from forward P/E ratios (R-squared 0.02), a consequence of their greater sensitivity to macroeconomic factors and earnings volatility. As of 27 July 2025, the Russell 2000 trades at a forward P/E of 18, compared to 15 in early 2020, amid expectations of EPS growth rebounding to 12% in 2026 following a subdued 2025.
| Index | 10-Year EPS CAGR (2014-2024) | 10-Year Price CAGR (2014-2024) | Current Forward P/E (as of 27 Jul 2025) |
|---|---|---|---|
| S&P 500 | 7.8% | 11.2% | 22.0 |
| Nasdaq-100 | 10.5% | 15.1% | 28.5 |
| Russell 2000 | 4.2% | 6.8% | 18.0 |
These figures, derived from Bloomberg and S&P Global data, highlight how earnings growth underpins returns, with deviations often corrected over multi-year horizons.
The Role of Durable Companies in Compounding Returns
Investing in companies with resilient business models amplifies the benefits of earnings compounding. Such entities typically feature strong competitive moats, consistent cash flows, and an adaptability to disruptions. Firms like Microsoft and Apple have demonstrated this through decades of innovation and market dominance. Microsoft’s EPS grew from USD 2.10 in 2010 to USD 11.80 in 2024, a CAGR of 13.5%, propelling its stock from USD 25 to over USD 420 by mid-2025.
Compounding manifests in reinvested earnings and dividend growth. A study of the S&P 500 Dividend Aristocrats—companies that have increased dividends for at least 25 consecutive years—shows they outperformed the broader index by 2.5% annually from 1990 to 2024. As of 27 July 2025, this cohort yields an average of 2.8%, with projected EPS growth of 7% for 2026, compared to 5% for the S&P 500 overall.
Sentiment on platforms like X, including from accounts such as @thexcapitalist, often emphasises this long-term perspective amid the short-term noise. Verified discussions highlight the apparent futility of divining near-term market moves, advocating instead for a steadfast focus on earnings durability.
Case Studies in Earnings-Driven Performance
Examine Nvidia, a leader in graphics processing units. Its EPS surged from USD 0.90 in fiscal 2015 (ending January) to USD 12.96 in fiscal 2024, a CAGR of 34%. This propelled the stock from a split-adjusted USD 5 to USD 112 as of 27 July 2025. Analysts forecast EPS of USD 28 for fiscal 2026, implying continued compounding if demand for AI infrastructure persists.
Conversely, cyclical firms like those in the energy sectors illustrate the risks. ExxonMobil’s EPS fluctuated from USD 7.60 in 2014 to a negative figure in 2020, recovering to USD 8.89 in 2023. Its stock lagged the market during downturns but rebounded with earnings normalisation, underscoring the investor’s need for durability.
- Key Metrics for Durability: Return on invested capital above 15% sustained over 10 years.
- Earnings Volatility: Standard deviation below 20% in annual EPS changes.
- Debt Levels: Net debt-to-EBITDA ratio under 2x.
Implications for Investment Strategy
Given the earnings-price correlation, sound strategies should emphasise fundamental analysis over market timing. Forward-looking projections, based on historical patterns, suggest S&P 500 returns of 6-8% annually through 2035 if EPS growth maintains a 7% trajectory, per models incorporating current valuations. AI-based forecasts, derived from regression analysis of past data, estimate a base case of 7.2% CAGR, assuming no major recessions darken the outlook.
However, risks persist. Elevated valuations as of 27 July 2025 could lead to more modest 3-4% annual returns if this overvaluation unwinds slowly, as noted in some analyst outlooks. Diversification across sectors with strong earnings outlooks—such as technology, healthcare, and consumer staples—may help mitigate this risk.
In summary, the empirical link between earnings and stock prices validates a long-term approach, where compounding in durable companies generates wealth amid the inevitable uncertainty of markets.
References
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