Why Equity Markets Can Rise Despite Falling Earnings

Summary

The discussion offers several explanations for why stock prices may hold up even when current corporate earnings fall sharply during an economic shock. Lower interest rates can support higher valuation multiples because future cash flows are discounted less heavily. Investors may also price in an eventual earnings recovery, especially if they expect the disruption to ease. These mechanisms help explain how prices can reflect expectations about the future rather than current reported profits.

The answers also point to uneven effects across industries and the role of liquidity. Government stimulus and functioning credit markets may direct capital toward sectors seen as resilient, such as technology and pharmaceuticals, while hospitality and manufacturing face greater pressure. The discussion is an informal set of possible explanations, not a quantitative attribution or proof that these factors fully account for market performance. Its claims are specific to the pandemic period described and should not be treated as a general rule for every earnings decline.

Key ideas

• Equity prices reflect expectations about future earnings as well as current reported results.
• Lower interest rates can increase valuation multiples by reducing discount rates.
• Investors may anticipate an earnings rebound after a temporary shock.
• Market performance can diverge from the broader economy when large sectors have different exposures.
• Stimulus liquidity and healthy credit markets may affect where investors allocate capital.

Tags

# Why has the market gone up while earnings got pummeled?


# Why has the market gone up while earnings got pummeled?












Earnings are down 42% while the market is flat over march. Why are people assuming total economic collapse is great? Are they assuming iPhones will enter a massive growth spurt just because people are staying home?

## Answer by user35980 (score 0, accepted)

https://quant.stackexchange.com/a/57216

Perhaps there is also residue of the 2008 financial crisis in Wall Street mentality: while there is an oversupply of liquidity through unprecedented government stimulus, unlike 2008 (and lessons learned from it) credit markets are well-oiled and healthy - that cash has to find its way somewhere and tech+pharma+financials are the beneficiaries; while hospitality+manufacturing (for good reason) are the underdogs.

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/57208

This isn't really a quant finance question, but i'll offer my 2c:

(a) interest rates are 1% lower than before, which increases the P/E multiples of all stocks

(b) it is assumed that earnings will bounce back strongly in 2021/22, especially if a vaccine is discovered

(c) the stock market is not very reflective of the main street economy any more - a significant percentage is big tech, which has been less affected by the stay-at-home restrictions of the pandemic.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.