One positive for the stock market has been the dramatic rise in earnings following the financial crisis.

Most business students can tell you that stock prices supposedly represent the present value of the future earnings stream.

However, one reason for the current earnings spike has been the fact that the US dollar has effectively been devalued.

Slash the yardstick by which financial performance is measured (e.g. dollars to dollarettes) and relative performance will appear more positive.

For example, when corporate earnings are measured in dollars, an investor will find that earnings are currently greater than what was achieved during the dot-com bubble and fast approaching the record levels that were achieved at the tail-end of the credit bubble. However, when measured in another world currency such as gold (see the chart below), the earnings picture isn’t quite so rosy.

 

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This chart illustrates how S&P 500 earnings measured in ounces of gold actually peaked back in 2001, and has moved within the confines of a dramatic downtrend ever since.

From this perspective, the historic spike in earnings that began in the summer of 2009 doesn’t look all that historic, with current earnings coming in at a level that is significantly lower than what occurred at the conclusion of the dot-com and credit bubbles.

Here is a quote from Richard Russell, one of the well-known market commentators and Dow Theory experts: 

"Gold will be around, gold will be money when the dollar and the euro and the yuan and the ringgitt are mere memories."