I commented in a earlier post about how aggregate earnings change seems to have little influence on price changes, and how little investors take into account inflation when it comes to evaluating said earnings.

I also noted that when it comes to specific companies, earnings do matter. However, I was curious to see if that is really true. So I decided to run one test case, using General Electric.

The first table shows earnings from 1995 to 1997, showing nominal earnings (n), inflation adjusted earnings (1997 base), nominal price and price adjusted in 2007 dollars (prices and earnings adjusted for stock splits)

	 earnings(n) 	 earnings(I) 	 Price(n) 	Price(I)
1995	 $0.60 	          $0.81 	 $12.00 	16.18
1996	 $0.73 	          $0.96 	 $16.48 	21.58
1997	 $0.82 	          $1.06 	 $24.46 	31.49
1998	 $0.93 	          $1.18 	 $34.00 	43.08
1999	 $1.07 	          $1.32 	 $51.58 	63.64
2000	 $1.27 	          $1.52 	 $43.94 	52.43
2001	 $1.37 	          $1.61 	 $40.08 	47.07
2002	 $1.41 	          $1.62 	 $24.35 	27.93
2003	 $1.49 	          $1.68 	 $30.98 	34.87
2004	 $1.59 	          $1.73 	 $36.50 	39.77
2005	 $1.54 	          $1.62 	 $35.05 	36.93
2006	 $2.00 	          $2.06 	 $37.21 	38.25
2007	 $2.17 	          $2.17 	 $37.07 	37.07

CAGR     11.31%           8.56%          9.86%          7.15%

Not too bad a longish term correlation between earnings growth and price change - particularly if you back in the dividends paid out.

However, year over year changes show little correlation (using the nominal values)

	Price change	Earnings change
1995		
1996	37.33%	        22.22%
1997	48.42%	        11.82%
1998	39.00%	        13.41%
1999	51.71%	        15.05%
2000	-14.82%	        18.69%
2001	-8.78%	         7.87%
2002	-39.25%	         2.92%
2003	27.23%	         5.67%
2004	17.82%	         6.71%
2005	-3.97%	        -3.14%
2006	6.16%	        29.87%
2007	-0.38%	         8.50%

My take is, at least in regards to GE, even using a crystal ball estimate of forward earnings out over several years, does not give a good indicator of how the stock will actually perform over that time frame.

It seems that the Graham line about the market in the short run is a voting machine, in the long a weighing, still has a great deal of validity.

(any corrections in the data would be appreciated; I used various sources for the earnings, some from GE, most from Morningstar)