Why company earnings matter to you

Several factors can affect the price of a stock, but the fundamental factors driving stock prices are a company’s earnings and profitability from producing and selling goods and services.

Earnings and profitability are driven by sales less all forms of expenses – cost of raw material, suppliers, operating costs which include all employee related costs.

“Target Stock Sinks 25% on Earnings Miss, High Costs” – 5-18-22 WSJ headline

To be profitable a company must generate sales and manage costs on an ongoing basis and must be positioned to deal with ups and downs and outside forces. That means managing expenses and unlike government, must seriously consider the creation of long-term obligations and liabilities that are hard to change.

So, why are stock prices important to average Americans, only about half of whom own stocks?

The continued growth of company stock prices is positive for a company – an employer. Growth within a company is good for jobs.

Nearly all states still have pension plans and if the value of their trust funds drop, taxpayers are on the hook for more funding. To some extent the same is true for college and university pension plans and endowment trusts.

Employers providing pensions must contribute more to their trusts to maintain funding levels. This can take resources from raises or in the extreme even jobs.

“Dow Slides More Than 1,200 Points on Fears of a Recession” WSJ 5-18-22

Individuals can see their 401k and IRA funds dwindle. While time will heal the problem for many, those nearing retirement or already retired may have a serious problem.

It’s too bad our extreme progressive politicians who rant about greedy companies, price gouging and naively call for higher taxes on profits and at the same time higher wages don’t understand the big picture.