Tickersense finds that during earnings season (between the reports of Alcoa and Walmart), the S&P 500 gain is 9.7% since October 2002 and 53.4% in the earnings off-season.
CXO Advisory reviews a paper about predicting stock returns via an accounting fundamentals model. They find that earnings explains 10% of stock returns, while adding other factors such as capital investment, changes in profitability and portunities boost the model performance to 17.4%. CXO Advisory has constructed their own Real Earnings Yield Model.
Lloyd's Investment Blog has a series of posts on stock returns and earnings. In Taming Fat Tails for Fatter Profits, he finds that with a high correlation (0.76), stock returns are equal to 0.8 times earnings growth as reported by value line. Moreover, he finds that earnings growth is more persistent than stock returns (fatter tails), and this is due to some persistent high growers. He then logically looks at whether strong EPS growth can predict stock returns with a fairly significant edge. Adding PEG as a value measure performs even better. He then uses the findings to pick some stocks going forward.
In Importance of Earnings Reliability, Part I, he looks at a measure for earnings reliability similar to the Sharpe Ratio:
Earnings reliability = (Average change in EPS)/(Std. dev. of EPS changes)
In Part II, he finds that higher earnings reliability is correlated with higher returns with an r-squared of 0.24, but in Part III, he finds that earnings reliability is not a good measure alone for predicting future returns.
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