After bottoming in Q1 2016, S&P 500 operating earnings just posted a new record high. So what happens next?

The chart below examines new record highs in the post-WW2 period. In 13 of 14 cases occurring in bull market environments (defined by the 20-month moving average), price continued to rally after record earnings were first recorded. But the indicator is not perfect. Three of the successful cases had minimal rallies, ranging from 6%-10%. And one case – 1976 – produced no follow-through rally.

Over the past 80 years, then, the market has rarely lost steam at the first appearance of record earnings. This is useful information for empirically minded investors. The earnings cycle is still young by historic standards. And earnings growth mitigates lofty valuations. By weight of evidence, today’s bull market has room to run.

Q2 reporting season is nearly complete. And as usual, the financial media has presented a confusing array of “beats” and “misses.”  We hope our bird’s-eye view adds clarity to the earnings story.

Don’t expect bull-market exhaustion at first sight of record earnings.