It is said, “stocks prices follow earnings.” Suny Park, Head of Institutional Client Strategy, discusses why this isn’t currently the case and what investors should consider as a result.

Key takeaways

  • It is said, “stocks prices follow earnings;” however, as many frustrated quality or growth-at-a-reasonable price portfolio managers will attest the broad US equity indices have turned this adage on its head.
  • The weight of non-earners has steadily increased from about 20% in September 2016 to about 37% of the Russell 2000 Index at the end of September 2021.
  • Despite generating positive absolute returns, as long as stock price momentum remains disconnected from the underlying earnings and cash flow growth, actively managed quality or growth-at-a-reasonable price portfolios may continue to underperform their respective benchmarks.