Earnings drive stock performance … Luke Lango is bullish on earnings … but what about Walmart? … Louis Navellier sells an AI energy play … Grok-3 for the win
We can speculate about Trump tariffs… inflation… interest rates… geopolitical risk… or any other market influence on your mind…
But at the end of the day, whether your stocks go up or down depends on one thing:
In the long run, the strength (or weakness) of earnings drives stock performance.
To illustrate this, below is a chart spanning from 1945 to Q3 of last year. It compares the S&P’s price to its trailing 12-month operating earnings.
Notice two things…
First, over the long-term, these two lines have an amazingly strong correlation. This underscores our point: In the long-run, earnings drive stock prices.
Second, notice how the S&P’s earnings line (in blue) is smoother than the S&P’s price line (in green). And though price bounces around, it always eventually returns to its earnings line, a bit like a magnet.
A chart spanning from 1945 to Q3 of last year. It compares the S&P’s price to its trailing 12-month operating earnings. They are highly correlated
Source: Investment Strategy Group, Bloomberg, S&P Global
Price can deviate from earnings for stretches due to investor euphoria or despondency, but it always reverts to earnings…eventually
This is what’s behind much of Luke Lango’s current bullishness.
For newer Digest readers, Luke is our technology/hypergrowth expert, and the analyst behind Innovation Investor.
From Luke:
Over the past few weeks, companies across America have been reporting fourth-quarter earnings results. So far, those numbers have been very strong.
About 80% of companies in the S&P 500 have reported earnings so far this season. More than 75% have beaten Wall Street’s profit estimates, meaning they made more money last quarter than analysts expected.
Meanwhile, the blended earnings growth rate is nearly 17%, which marks the index’s highest profit growth rate since 2021.
More importantly, trends are expected to stay strong for the foreseeable future.
That is, next quarter, earnings are projected to rise about 8%, then another 9% in Q2. They are expected to rise almost 15% in the third quarter and about 13% in the fourth.
Bearish pushback
A bear’s first rebuttal might be, “Well, what about Walmart this morning?”
If you missed it, shares of the retail giant sunk after the company’s forward guidance disappointed Wall Street. As I write, the stock is on pace for its worst day in nearly three years.
(Full disclosure: I own Walmart.)
Let’s be clear about what happened…
Walmart’s numbers were strong. The company beat on both profits and revenues and hiked its dividend by 13%. So, earnings are, in fact, healthy…which is partially why Walmart set an all-time high earlier this month.
The possibility of reduced earnings/revenues in the future is what sunk the stock this morning. But the reduced guidance feels more like “lowering the bar given economic uncertainty” rather than “waving a red flag.”
From CNBC:
Chief Financial Officer John David Rainey described consumer spending patterns as “steady” and said, “there’s not any sharp changes that we’ve seen.”
Yet he acknowledged “there’s far from certainty in the geopolitical landscape.”
Plus, we should remember that one company’s forward guidance doesn’t represent the entire earnings landscape. Even if Walmart’s earnings slow, that doesn’t mean that another company won’t see explosive earnings growth.
Now, a second rebuttal could be, “But the earnings growth Luke references merely ‘catches earnings up’ to elevated prices that had already surged way ahead, stretching valuations.”
Even if we accept that as true, a closing of the gap between earnings and price takes pressure off those stretched valuations. And that gives stock prices room to push even higher, returning to yesterday’s stretched valuation before today’s earnings growth.
Either way, robust earnings are supportive of conditions that push stock prices higher.
This broad snapshot of earnings growth is bullish, but the earnings for each of your stocks is more important
And this is where legendary investor Louis Navellier just showed us why professional investors tend to outperform average investors.
On Tuesday, Louis recommended his Growth Investor subscribers sell Eaton Corporation plc (ETN) for a loss.
It wasn’t a big loss – only about 2% after you include dividends. But Louis was willing to take the loss because ETN no longer met his strict criteria for a strong stock.
For newer Digest readers, Louis is one of the early pioneers of using quantitative algorithms to scour the markets for strong stocks. Forbes even named him the “King of Quants.”
As a quantitative investor, Louis’ market approach is rooted in cold, impartial numbers. When his algorithms identify an attractive opportunity, he dives in, deciding whether it’s attractive enough to recommend.
Similarly, when his systems warn him of flagging fundamental weakness, he analyzes whether it’s time to get out to sidestep a potential pullback.
“Get out” was the takeaway for ETN.
From Louis’ Sell Alert:
Earlier this month, Eaton Corporation plc (ETN) slipped to a D-rating in Stock Grader despite reporting record results for its fourth quarter in fiscal year 2024…
ETN shares pulled back in the wake of the quarterly and yearly results since the company missed analysts’ sales estimates…
Add in the fact that analysts have lowered earnings estimates for the first quarter in the past month and buying pressure remains minimal (as evidenced by its D Quantitative grade), and I recommend that we go ahead and sell our position into today’s strength.
Why many investors would have a hard time making the same choice
Eaton is a great company that’s well-positioned to ride the AI-related data center boom. It provides power distribution and backup solutions, ensuring reliable energy flow to AI-driven data centers. But it’s also a player in energy transition, making it a strong long-term leader in power management.
Many investors would make this their single focus. Instead, Louis follows his system and the numbers, prioritizing “proven strength now” over “potential strength later.”
His “sell” decision represents a market approach that many of the most successful traders follow: Trade the market that’s in front of you, not the market that you hope will be in front of you.
I will note that Louis is still focusing on AI’s power needs and the resulting investment opportunities…
The next wave of AI will require unprecedented computing power. And there’s one company in Louis’ crosshairs that’s developing the crucial hardware that could power these advances. Its solutions could dramatically reduce power consumption while increasing processing power. Louis will give you more details on it right here.
Finally, the latest AI bots are arriving, and their capabilities point toward a continuation of today’s AI bull
Earlier this week, Elon Musk’s xAI released its updated Grok-3 chatbot.
Here’s Bloomberg with how advanced it is:
Across math, science and coding benchmarks, Grok-3 beats OpenAI’s GPT-4o, Alphabet Inc.’s Google Gemini, DeepSeek’s V3 model and Anthropic’s Claude, xAI said via a live stream on Monday.
Grok-3 has “more than 10 times” the compute power of its predecessor and completed pre-training in early January, Musk said in a presentation alongside three xAI engineers.
But Grok-3’s computing power leadership could be short-lived. Let’s jump to our technology expert Luke Lango:
Meanwhile, the world’s leading AI company – OpenAI – just announced that it will soon unveil its latest-and-greatest model, ChatGPT-4.5, within the next few weeks.
Reportedly, ChatGPT-4.5 is designed to process and remember more information, leading to more fluid and coherent conversations – an improvement particularly beneficial for multi-step processes.
It also aims to engage in more natural and dynamic interactions, making it a powerful tool for customer service, virtual assistance, and other dialogue-based applications.
Luke goes on to report that ChatGPT-4.5 will integrate with OpenAI’s newest Operator feature. This is an AI agent designed to autonomously perform web-based tasks by interacting with on-screen elements – think buttons, menus, and text fields.
What Grok-3 and ChatGPT-4.5 mean for the AI stock boom
After profiling the capabilities of Grok-3 and ChatGPT-4.5, Luke pivots to a critical point for investors…
These cutting-edge chatbots are paving the way for the emergence of hundreds of new AI applications over the next few months.
These new AI apps should proliferate throughout the global economy by late 2025…resulting in more sales and profits for their developers, more spending on the AI data centers that power them (so, greater profits for data center plays), and more demand for the surrounding infrastructure that enables the computing power (more profits for related components plays).
And this brings us full circle to how we opened this Digest:
At the end of the day, there’s one thing that will make or break your portfolio:
Earnings.
Despite some market overhangs today, earnings forecasts are up as we look ahead to the rest of 2025.
That doesn’t give us a license to just “stay in the market” without thoroughly analyzing our current stocks. We still must do the hard work of separating the fundamentally superior stocks from all else – same as Louis did with Eaton.
But if you own a great company that’s posting robust earnings growth, that’s a strong indicator of a higher stock price ahead.
Here’s Luke to take us out:
As go earnings, so go stocks.
With more fantastic earnings growth on the horizon, stocks are likely on the launching pad to fresh highs. And for those investors who get in early, before those gains continue, the profits could stack up fast.
