 Good day, fellow investors. Welcome to the stock market news with a long-term fundamental twist. We are in the midst of earnings season, so today we're going to discuss earnings from a long-term perspective. Earnings are crucial, perhaps the most important, not perhaps the most important factor when it comes to your investment returns. Your investment returns, as Buffett always says, will be perfectly correlated with the underlying performance of the business, thus earnings. So in this video, I really want to focus on the importance on earnings, on the current trend in earnings, on valuations, what is the perspective that we can get now on earnings in order to see what will be long-term investment returns from the current point. That's what matters, not what matters in the past, not what happened in the past. And then see what are the impacts, the factors impacting those earnings, how are those going to affect your long-term investment outcomes. Let's start. So if you look at the importance of earnings, the long-term correlation between share prices and earnings per share is extremely strong. Warren Buffett says it's perfectly correlated, well statistically not perfectly, but you get the point with this picture. The white line is the SAP 500 trailing 12 months earnings per share and the blue line is the SAP 500. There are some deviations here and there, but over the long term it's practically a straight correlating line. The better earnings are, the better are your returns. There can be sometimes of exuberance, sometimes of less exuberance, but that's pretty much it. And we now have to see okay, what's next? This has been over the last 70 years and we have to see okay, where we are now and what's next, what do valuations say, what do trends, what do margins say. And by the end of this video you will get a great picture about where are earnings going, what's influencing earnings and what you can do about that in respect to your portfolios and how your portfolio's structure for what is happening. The most important things we are going to discuss are margins, debt earnings are actually in a recession, real reported and adjusted earnings, big differences there, financial engineering and earnings and then US and global earnings. Let's immediately start with margins. It is very likely that margins will return to the mean. What does that mean? Well, the higher the margins, in this case the net profit margin, the higher are earnings, the higher are stock prices. However, over the past 50-70 years, on average earnings have been 6-8% of gross domestic product of GDP. Currently, we are at 10% and over the last 10 years, thanks to low interest rates, thanks to lower taxes, it has been even above 10%. Buffett always says that corporate earnings should be between 6-8% of GDP. As GDP growth will be 2%, it's likely that earnings will be those that revert to the mean and that earnings margins will be lower. Just one example of how this works. During the last two years, for the first time, over a very long period of time, air quality in the US has decreased. This means that pollution is higher, health will be affected, 10,000 debts are expected, more 10,000 debts per year due to quality of air and if companies save on air quality, their earnings are higher. This must change, this will probably change in the future and therefore this is just one thing that puts pressure on earnings, not to mention higher taxes, probably higher wages in the future because wages didn't grow much in the past. This is something to keep in mind for long-term investors. We are really in a Goldilocks period for margins and therefore earnings and we already see the impact of those things slowly. Late part of the economic cycle, economic growth slowing down and you see that those margins have been contracting a little bit. You see 2018 tax benefit, lower corporate taxes that really pushed margins higher but now after that boom, what will be the next thing pushing earnings higher, margins higher, we don't know and therefore earnings are a little bit subdued and they are actually already in a recession. So apart from the possible mean reversion of margins, for the last three quarters earnings really didn't grow at all. We have seen negative earnings growth, didn't affect stocks. I would be in panic if I would see negative earnings growth on aggregate but stocks keep pushing higher, keep going higher, keep staying above 3000 for the SAP 500 but the earnings picture which is crucial when it comes to long-term investing isn't good at all and also analysts have been adjusting their estimates and they have really reduced their estimates for 2020. Those are always very positive estimates at first and then they are adjusted to the negative but still we see a negative trend and we haven't seen a recession yet so in combination of a recession in 2020-2021, who knows when it might happen, it could be very very detrimental for stocks and there are other forces impacting buybacks, margins, earnings that we'll discuss in a moment but this is just one side of earnings. The real earnings reported, there are real earnings reported and financial earnings, financial engineered earnings. The National Income and Profit Accounts Association calculates earnings in relation to GDP and you can see how the black line here over the past 10 years earnings in relation to GDP which means that the real productivity, the real earnings capacity of companies didn't grow at all. The black line is a flat line then you have SAP 500 trailing earnings per share. Those started growing in 2015 to 2019 and then flattened again but that's not because there was actually some growth just because of financial engineering through buybacks and taxes. So if you look at this from an objective perspective, okay is the economy doing really better beyond financial engineering there is little evidence that corporate America is as strong as it appears. If you look at the blue line stocks don't care about anything, interest rates are going lower therefore stock prices go to the moon and everything is much more valuable. However the discrepancy in earnings is something to be very very very worried about and I think that the next stock market crash will come due to earnings. If we remove the tax benefits, remove engineering based on debt that leads to buybacks earnings didn't go anywhere. Talking about buybacks look at the extreme amount of buybacks during 2018 and 2019. It's crazy how much buybacks have been down 800 billion on a what 40 trillion market capitalization so that's a little bit less than 3% per year of the market capitalization is bought back by companies themselves so companies are crazily investing your money into their own stocks. This of course helps earnings a little bit but I wonder whether the cost is justifiable whether the cost of stocks now is justifiable to do buybacks wouldn't it all wouldn't we all be better if they would simply pay out this dividends and then let us decide what to do with the money not push buybacks at historical highs why didn't they do so much buybacks in 2009 when the SAP 500 was a real bargain so this is the story earnings matter and therefore we have to carefully watch them. Another thing that we have to really look at and perhaps the most important things are valuations what are we paying what's the price now for the earnings the price to earnings ratio because apart from the correlation with earnings stock prices are also stock market returns are correlated to the valuation to the price you're paying for those earnings and that paints a perfect picture to what we already have been discussing SAP 500 earnings normal earnings not adjusted for whatever they are adjusting every year are 135 points and they haven't been growing that much since 2007 approximately over the last 40 years two percent per year and that is the long-term trend ups and downs taxes have helped a bit but it's not miracles if we look at the price earnings ratio is 22.46 this translates into an earnings yield so what are the businesses earning if I buy the SAP 500 at three thousand let's say dollars what is my earnings yield what are those businesses giving back those businesses are giving you 4.47 percent in earnings but keep in mind this 4.47 percent is at historically high margin levels so those margins will probably revert to the mean at historically high buybacks where companies are pushing those stock prices up up and up and at historically high earnings in the late part of the cycle so it's very likely that those earnings will revert to the mean the margins the trend will revert we will might see economic slowdown which we are already seeing globally Germany China slowing down a little bit so the picture is very negative and this 4.47 percent is the maximum so the on the most likely option is the way down not more up like prices are suggesting valuations are suggesting stock prices will go higher and higher because everybody's betting that interest rates will go lower I wouldn't bet I would base my investment on the long-term trend earnings are correlated to investment returns ups and downs short-term sometimes you win sometimes you lose but that's something very risky to do and then if we look at the connection with the cyclically adjusted price earnings ratio that takes 10 years of earnings into account average 10 year earnings and long-term returns the k-pratio is now at 30 and if we look at the expected returns over the long term over the next 15 years you can expect 3 to 5 percent not more from investing this is the truth about earnings plus there could be ups and downs and the trajectory where earnings could lead over the next 10 years is unfortunately down if that happens if earnings start to matter again when the financial engineering power stops and at some point it will stop a lot of investors will be in for a big big nasty surprise so when you see that baby boomers might be start to might have to start selling stocks and now they're selling just a little bit yes a p500 goes up but in panic they know that okay I need that money in the next 5 10 years there might be a real crash into selling stocks to go to safety when that happens and if it is combined with low earnings low cash flows for companies combined with a recession which means there cannot be buybacks at the scale they those are now at the scale those are pushing stock prices higher now then you have really a spiral that might look very very badly when it comes to investing we don't know when it might happen we don't know how it will develop will it be a sharp drop a slow drop will it be zero returns over the next 10 years so the only thing we can do is focus on those fundamentals find businesses that will likely grow earnings over time that are fairly priced that have a competitive advantage and that's what I always do this video was to put things into perspective how important are earnings and then what I focus and you'll see in the next videos about the stocks we analyze also sharing something from my research platform I really focus on those earnings and I try to find those earnings that will go stronger stronger and stronger over the next 10 20 years no matter the short term fears of this case financial engineering stopping recession or something like that we have to find businesses that overcome short term factors short term impacts just another chart here American companies out earn the world so it's very interesting how it's different economies different scales and it might be questionable whether this will be the case also in the future America did really well over the past 40 40 50 70 years perhaps the world will do even better in the future we will see to conclude the high valuations suppose optimism that earnings will continue to grow in the future and if we look at valuations at earnings at margins at fundamentals at everything at the economy at late stage of the economy it's unlikely that earnings will continue to grow how it was the case or due to financial engineering in the past interest rates are very low they go low but that can go lower but that's not an impact on earnings on businesses so we will see what happens I try to focus on businesses business earnings looking at hundreds thousands of businesses to find those few businesses that have a competitive advantage no matter what and that give me earnings returns over the next 10 20 30 years I know that earnings win therefore it's crucial to focus on those earnings and see how your portfolio is doing on that perspective on the earnings perspective that is what is the key when it comes to your long-term investment returns check my stock market research platform for my businesses for my portfolios for my research perhaps it fits you perhaps not subscribe to the channel for more fundamental investing the book lottery is still on so subscribe to the newsletter in the link below and I'll randomly pick 50 of you to deliver the book thank you for watching looking forward to comments and I'll see you in the next video