To test whether variation in the earnings–price correlation has any predictive value for stock returns, we ran regressions of correlation levels against subsequent annualized returns.
The R² between S&P Composite earnings and price from 1871 through 2024 is very high at 0.95. Given the strength of this long-term relationship—and the relative rarity of low-correlation periods—it is reasonable to ask whether those periods might function as buy or sell signals. In other words, does variation in the earnings–price correlation help predict future returns?
I evaluated this question across multiple rolling time horizons. The resulting R² values — linking correlation levels to subsequent annualized returns — were far lower than the R² between earnings and price themselves. For the rolling 10-year and five-year windows, the R² fell close to zero, indicating virtually no predictive relationship.
The rolling 50-year period showed the strongest relationship with a R2 of 0.53.