Why Stock Prices Eventually Follow Earnings - Not The Crowd

Chuck Carnevale explains why stock prices follow earnings over time—and how valuation, patience, and business fundamentals can help investors look beyond the crowd.

Why can a company report solid business results while its stock price struggles? And why do some stocks soar far beyond what their earnings appear to justify?

Stock prices reflect the decisions of buyers and sellers, whose expectations can shift quickly. Enthusiasm, fear, and uncertainty can push a stock above or below a reasonable valuation—and keep it there for an uncomfortable stretch of time.

In this video, Chuck Carnevale, co-founder of FAST Graphs and known as Mr. Valuation, explains his business-focused approach to understanding those movements. His central principle: over the long run, a company’s earnings help determine the direction of its stock price.

Think of Stock Price as a Dog Walking With Its Owner

In All Investing Is Value Investing, which Chuck co-authored with Nathan Mock, the relationship between price and earnings is illustrated through a familiar scene: a dog walking with its owner.

The dog might race ahead, stop to investigate something, or fall behind. Its movements can look unpredictable from moment to moment. Yet the owner’s route establishes the overall direction of the walk.

In this comparison, stock price is the dog, and the company’s earnings represent the owner.

Investors often spend their time watching the dog. They react to price changes, headlines, and the opinions of other market participants. Chuck encourages them to pay closer attention to where the business is going.

Is the company increasing its earnings? Has its growth slowed? Are its operating results recovering after a difficult period?

Those questions provide context that price movements alone cannot supply.

What the FAST Graphs Valuation Line Represents

Using FAST Graphs, Chuck examines the relationship between business performance and market price across several companies.

The orange valuation line provides a fundamental reference based on the selected operating metric and valuation multiple. For many businesses, the analysis centers on earnings. For Realty Income (O), a real estate investment trust, Chuck uses adjusted funds from operations, or AFFO.

An essential part of his explanation is that this line should be viewed as a reference for a reasonable valuation range. It is not an exact calculation of what a stock must trade for on a particular day.

When price moves substantially above that reference, investors can investigate whether the business’s prospects justify the premium. When price falls below it, they can examine whether the discount represents an opportunity or reflects a deterioration in the business.

The chart helps frame the questions. Understanding the company remains part of the work.

A Good Business Can Still Be a Disappointing Investment

One of the video’s most practical lessons concerns the price investors pay.

A company can continue growing while an investor earns an unsatisfactory return. If the initial purchase price already reflects overly optimistic expectations, subsequent business growth may be offset by a declining valuation multiple.

Chuck uses Realty Income to illustrate this distinction. In the period he examines, dividends accounted for much of the investor’s return, while the share price contributed little.

That example highlights why evaluating the quality of a business and evaluating the attractiveness of its stock price are separate steps.

Strong operations matter. So does the valuation at which you become an owner.

Why Prices Can Stay Disconnected From Fundamentals

If earnings are so important, why do stocks spend years trading above or below earnings-based valuation references?

Because investors do not respond to business information with perfect consistency.

Confidence can turn into excessive optimism. Disappointment can turn into persistent pessimism. Even when business results begin improving, investors may wait for repeated evidence before changing their expectations.

Chuck discusses Ingredion (INGR), Cummins (CMI), and Pentair (PNR) to show how price and fundamentals can diverge and later move closer together. The examples span different business conditions and different timelines.

The timing is a central part of the lesson: identifying a valuation gap does not tell an investor when that gap will close.

Valuation Helps Assess Risk, but It Does Not Provide a Calendar

Chuck makes a clear distinction between valuation and market timing.

An investor may conclude that a stock appears inexpensive relative to its earnings and prospects. That conclusion does not establish whether its price will recover next month, next year, or over a much longer period.

Likewise, an expensive stock can continue rising before its valuation becomes more restrained.

Valuation provides a framework for considering the relationship between price, business performance, and expectations. It cannot reliably predict the next market move.

This distinction matters because patience is easier to discuss than to practice. Buying at an attractive valuation can still involve an extended period of disappointing price performance.

Investors must also continue monitoring the business. An investment thesis depends on the fundamentals supporting it.

How Undervaluation Can Create Opportunity

Buying below a reasonable estimate of business value can provide a margin of safety.

In the examples Chuck presents, investment returns can benefit from two developments: growth in the underlying business and a recovery in the valuation investors assign to that business.

Cardinal Health (CAH) illustrates this interaction. Chuck reviews a prolonged period of depressed valuation, followed by stronger earnings and a substantial price advance.

He also explains that an investor does not necessarily need to wait for a stock to reach a full valuation estimate to experience a meaningful gain. A partial recovery from a sufficiently discounted starting price can contribute to returns.

These historical examples illustrate the approach; they do not establish a guaranteed outcome for another investment. The purchase valuation, subsequent business results, and holding period all matter.

Growth Changes the Valuation Picture

Chuck turns to NVIDIA (NVDA) to explain how accelerating earnings growth can change an investment analysis.

A company’s earlier history may include slower growth, while a more recent period shows a substantially different earnings trajectory. Understanding that change is important when assessing its valuation.

Faster earnings growth can shorten the time required for earnings to double. If that growth materializes and the market continues assigning an appropriate valuation, it can support substantial appreciation.

However, the analysis still depends on the durability of growth and the price paid for it. A strong growth record does not remove the need to evaluate expectations.

Chuck’s broader principle remains consistent across slower-growing businesses, cyclical companies, and faster-growing companies: study the operating performance that supports the stock’s value.

Focus on the Businesses You Own

The video encourages investors to adopt the perspective of a business owner.

Instead of allowing every price movement to dictate their confidence, investors can ask:

• How are the company’s earnings or relevant cash flow measures developing?

• What expectations appear to be reflected in the current price?

• Does the valuation offer a reasonable margin of safety?

• Have the fundamentals changed enough to reconsider the original investment thesis?

Chuck’s phrase, “mind your owned businesses,” captures that approach.

Following earnings does not eliminate uncertainty. It gives investors a more concrete basis for evaluating their holdings than the crowd’s changing mood.