One simple -- yet powerful -- measurement of stock market health is to assess whether companies are making more money today than they were one year ago. There are currently about 4,000 publicly-traded companies in the U.S.
The Leuthold Group (a Minneapolis-based research and investment firm) compiles the earnings data for all 4,000 of those companies on a monthly basis. Specifically, they are reviewing the Earnings Per Share (EPS) data, which is reported quarterly by each of the 4,000 companies.
As of the most recent reading of this indicator, more than 53% of U.S. companies are earning higher profits today than they were one year ago. If you were reviewing that data point in isolation (i.e. as a stand-alone metric), you might suppose that 53% is not a very healthy number. And you would be right. Looking at the chart below, the current reading is uninspiring relative to the past.
However, even more important than the current percentage reading is the direction of change in the reading. At this point, earnings appear to have put in a bottom (or low), meaning more and more companies are growing their earnings vs. one year ago.
Dating back to the mid-1980s, any monthly increase in percentage has led to an average annualized return of greater than 12% in the period to follow. As you can see below, we have seen several consecutive "uptick" readings of this indicator, which bodes well for future stock market performance.
The major caveat here is that we are dealing in averages, not certainties. This is but one indicator of market internals, and there are many others to consider. Further, earnings could regress in the coming months or quarters, leading to a decrease in the percentage of companies with rising earnings. That would be a change to this signal.
Nonetheless, this is a very broad indicator, as it considers every listed company in the U.S.