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It’s corporate earnings season again, and everywhere you turn, analysts talk about the influence of earnings on the broad stock market:

• US Stocks Surge On Data, 3Q Earnings From JPMorgan, Intel (Wall Street Journal)
• Stocks Open Down on J&J Earnings (Washington Post)
• European Stocks Surge; US Earnings Lift Mood (Wall Street Journal)

With so much emphasis on earnings, this may come as a shock: The idea of earnings driving the broad stock market is a myth.

When making a statement like that, you’d better have proof. Robert Prechter, EWI’s founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt; italics added):

Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth [in the 1980s] can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “[This] may have just blown a hole through this most cherished of Wall Street convictions.”

What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

And in 2004, EWI’s monthly Elliott Wave Financial Forecast added this chart and comment:

Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed.

So if earnings don’t drive the stock market’s broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors’ mood — or social mood — changes before “the fundamentals” reflect that change, which is why trying to predict the markets by following the earnings reports and other “fundamentals” will often leave you puzzled. The chart above makes that clear.

USDCHF Analysis.
USDCHF formed a trading range between 1.0148 and 1.0285. Pullback to 1.0100 to reach next short term cycle bottom on 4-hour chart could be seen in a couple of days. However, the price action from 1.0285 is more likely consolidation of uptrend from 1.0032, as long as 1.0032 support holds, we’d expect uptrend to resume and another rise towards 1.0400 is possible.

USDCAD Analysis.
USDCAD stays in a rising price channel and remains in uptrend from 1.0206, another rise towards 1.0900 is still possible. Key support level is located at 1.0627, below this level could indicate that the rise from 1.0206 has completed, then the following downward trend could bring price back below 1.0206 previous low.

EURUSD Analysis.
EURUSD traded in a narrow range in last three trading days. Now the price action from 1.4683 is more likely consolidation of downtrend from 1.5062, another rise to 1.4920 to complete the consolidation is expected. Support level is at 1.4683, below this level will indicate that the downward trend has resumed, then another fall could take price to 1.4550-1.4600 area.

USDJPY Analysis.
USDJPY remains in short term downtrend form 92.32. Deeper decline towards 88.83 to reach next cycle bottom on 4-hour chart is possible in a couple of days. However, rebound would more likely be seen before breaking below 88.03 level, and another rise to 94.00 is expected.

GBPUSD Analysis.
No changed in our view, GBPUSD stays in a trading range between 1.6251 and 1.6692. The fall from 1.6603 could possibly be resumption of downtrend and another fall towards 1.6000 area would more likely be seen, a break below 1.6251 will confirm such case.

AUDUSD Analysis.
AUDUSD trades in a range between 0.8942 and 0.9180, and the price action in the trading range is treated as consolidation of downtrend from 0.8326. Deeper decline to 0.8700-0.8750 area is still in favor and a breakdown below 0.8942 will signal resumption of downtrend.