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Supply and Demand: What does it tell us about the stock market?

It is easy to lose sight that corporate fundamentals are the primary driver of the stock market over the long run. Most media attention is focused on geopolitics, hand-wringing over Washington, and fluctuations in economic data. Quietly, however, U.S. companies continue to generate record profits and dividends.

The top chart plots per share earnings and dividend growth for S&P 500 companies. Through October, earnings grew 9.8% year-over-year. Dividends grew 14%. Stock investors have enjoyed rising share prices and higher streams of income.11.17.14

Per share is an important distinction. Earnings growth can be diluted or amplified if share counts are rising or falling. Today, American companies are repurchasing shares at a rate of more than 3% per annum, helping to boost per share numbers. Moreover, fewer corporations are listed on U.S. stock exchanges today as companies are bought out or choose to remain private. In fact, with Wilshire 5000 index now contains just 3,698 companies, meaning fewer overall shares are available for purchase.

Like any market, stocks prices are determined by supply and demand. The ongoing reduction in the supply of shares has become a stealth tailwind for stocks.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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