Shares: Profits

Buy when the coloured lines trend higher, sell when they trend lower

This tool is intended to show the influence on share prices of corporate profits. It is designed not only to show the historic relationship but also to provide a best guess as to the future trend. PIT has developed an econometric model to forecast these from the top-down, so as to avoid the widespread tendency for over-optimistic forecasts generated by aggregating bottom-up Earnings per Share forecasts. For comparability, stock market indexes have been rebased to set year-end 1994 at 100, and the Earnings per Share profits series has been rebased to set 1995 at 100.

In each chart the stock market index is shown as the thick white line on the right hand axis. The main explanatory variable, the index of historic Earnings per Share, shown as the thin yellow line,  uses the left hand axis as does the Best Guesses for its future development, shown as the thin orange line.

Both historic data and Best Guesses should be treated as general indications of trend only. As historic data on whole market Earnings Per Share is seldom available, this series has been derived from a variety of sources of historic data. In order to achieve compatibility these have required considerable adjustments. Thus even the historic data should be considered as estimates only.

Best Guesses suggest what would happen to future Earnings per Share based on the PIT econometric model, tested over 15 years of historic data, which utilises consensus estimates for GDP, interest rates, wages and prices. For some countries there is insufficient data to enable us to produce a meaningful econometric model for generating Best Guesses about Earnings Per Share.

There has been an important shift in the relationship between share prices and company profits over the past quarter century. Given the enormous resources now devoted by the securities industry to forecasting corporate profits, the focus of attention has moved forward from current year profits in the early part of the period to next year's profits in the latter part of the period.

Please note that comparisons between countries are subject to differences in the reporting of corporate profits. In general Earnings Per Share may be over-stated where there is a tradition of profit maximisation and early adoption of full consolidation of subsidiaries, as in Anglo-Saxon countries, and under-stated where the interests of outside shareholders may take second place to tax minimisation. In recent years these differences have begun to diminish.

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