This Is What Matters​

With the proliferation of different takes on equity investing, ranging from algorithmic trading to retail investors utilizing chat rooms, it may be easy to lose sight of one of the first principles of investing. It’s not about what’s hot now–which stock is moving or what technology is most anticipated. It’s about future earnings.
Earnings Growth Drives Long-Term Price Appreciation​​​​​​​​​

  • Over the past 120 years, the S&P 500’s price has increased 5.3% annually, driven by a 5.0% compound annual growth1 rate in EPS. In other words, 95% of stock market price appreciation has been driven by earnings growth.

  • This relationship reinforces the old quote from Warren Buffett’s mentor, Ben Graham: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” That means that while shifting sentiment may drive variations in stock prices in the short term, long-term changes in equity prices have historically reflected actual corporate results.

  • With news stories about stock prices being driven up based on short interest or other non-fundamental considerations, investors may want to get back to first principles and embrace research and sound decision making. After all, the stock market is the ultimate corporate fundamental weighing machine.

1Compound annual growth rate is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance.

The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of February 2021. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares.

Risk Disclosure: Investing in the stock market involves certain risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments.​

Fred Alger & Company, LLC 360 Park Avenue South, New York, NY 10010 / 800.305.8547 (Retail) / 212.806.8869 (Institutional) ​​