Earnings do not matter

During the past several days, we have seen the market decline on great/positive earnings from market bellwethers or, at the other end of the spectrum, markets rally on very poor and disappointing earnings like those of Citi, or IBM.

Market participants have been surprised: earnings have been ignored so far in this earning season. And this seems to contradict common sense, specially all those analysts spending their days building models in their spreadsheets or stock pickers and so on and so forth.

The fact is, earnings do not matter for several reasons:

• One reason earnings have been ignored is that market to market has disappeared for banks, and their earnings are meaningless if at all there were any positive earnings (see my post here).
• Earnings are like a rear-view mirror and do not provide in any way some vision about what the future of the company will be
• Macro economic factors matter more than anything but...
• ...sentiment. The most important factor of all.

Today, Babak over at Trader's Narrative explained it in such a nice way that it's like poetry to me, so I'll quote him here:

Generally speaking, earnings do not really matter. This is because at different times, each dollar of earnings is worth a different amount to investors. At times, it is worth very little and at other times, the same dollar of earnings is bought at astronomical multiples.