The Most Important Latin Phrase In Investing

Almost every day, we hear about economic data, financial news, a policy move, a geopolitical event, or some other development that presents a new headwind to the stock market. Rising inflation, higher interest rates, natural disasters, tariffs, war breaking out between our trading partners, viral outbreaks, and so on.

Any of these challenges could hurt business activity or reduce an investor's appetite to take risk in the stock market.

But as history — including recent history — has taught us, it's possible for the economy to flourish and the stock market to rise despite emerging headwinds.

These counterintuitive outcomes can often be explained by the most important Latin phrase in investing: Ceteris paribus.

All else equal 🧐

Ceteris paribus roughly translates to "all else equal" or "other things held constant."

It's a caveat analysts use when they are examining and discussing the effects of a variable assuming nothing else is changing.

For example: Rising oil prices, ceteris paribus, mean lower earnings because of higher energy costs.

Ceteris paribus gets you clean and simple explanations.

Unfortunately, the world is complicated. And all else is never equal.

What if those higher oil prices are the result of stronger demand from a hotter-than-expected economic activity? This could mean revenue for your business is growing faster than planned, which could more than offset your higher energy costs, which in turn means your earnings are higher.

This is how I've been discussing evolving expectations for Fed rate cuts for more than a year. Fewer rate cuts, ceteris paribus, may be considered hawkish for stocks. But these lowered expectations have come amid better-than-expected economic data, which has fueled earnings growth and sent stock prices up and to the right.

TKer subscribers have seen this language used frequently when we've quoted analysts addressing emerging challenges (emphasis added):

"In general, we estimate every 10% rise in the USD translates to a 3% hit to EPS, all else equal." – BofA, January 2025

"We estimate that each 1 percentage point change in the statutory domestic tax rate would shift S&P 500 EPS by slightly less than 1%, or approximately $2 of 2025 S&P 500 EPS, all else equal." – Goldman Sachs, Sept. 2024

"Through the lens of our EPS model a 10% rise in oil would boost S&P 500 EPS by roughly 1%, all else equal." – Goldman Sachs, April 2024

"[C]omparing today’s valuation to its prior multiples may be more punitive in that today’s market is more asset-light, labor-light and debt-light than prior cycles and Corporate America’s renewed focus on efficiency argues for a lower equity risk premium all else equal." – BofA, October, 2024

"The S&P 500 effective tax rate would need to rise from 20% today to roughly 28% in 20 years to offset the potential earnings boost from AI adoption, all else equal." – Goldman Sachs, June 2023

"The impact from a 1% buyback tax is two-fold: 1) reduction in earnings from paying the new tax; 2) reduction in overall gross buybacks (all else equal) to compensate for the tax and thus a smaller reduction in ‘S' within EPS." – JPMorgan, September 2022

To be clear, ceteris paribus also means there could be other negative developments that aren't being considered, not just positive ones. Again, the world is complicated.

But in recent months and years, ceteris paribus has frequently been a reminder that even though we are witnessing challenges emerge, there's also a lot of things we're not talking about that could go right.

I've made this point a couple times. (See here and here.)

Notably, see the April 10, 2022 TKer: The wrong question — and the right one — to ask about earnings headwinds 💬. From that newsletter:

When a new headwind emerges, investors probably think to themselves: How will this hurt the earnings of the companies I'm invested in?

… The problem is we're asking the wrong question.

… The right question is: Can the companies I'm invested in deliver on earnings?

It's similar to the question above, but it broadens the scope of the inquiry to consider more than just the negative impacts of just the unfavorable developments.

Simply put, investors should not be thinking about the effects of some development in isolation. It needs to be considered in the context of everything that affects earnings. Because for investors, what ultimately matters is whether earnings will keep going up.

Recent developments 🌎

There's been lots of news about new tariffs and the potential for more tariffs down the road. And tariffs are almost universally considered negative for all of the economies involved.

It's a big deal, especially since many companies and analysts have yet to factor in the impact of tariffs into their earnings forecasts.

"We estimate that 25% tariffs on Canada and Mexico plus 10% incremental tariffs on China translates into a 2% hit to EPS, all else equal (1.7% from Canada & Mexico and 0.3% from China)," BofA's Savita Subramanian wrote in a Feb. 9 note.

As Subramanian's use of "all else equal" suggests, the situation is more complicated than simply calculating the cost of tariffs when applied to recent trade data. The ultimate effects could be much worse! And we're not even addressing all of the other tariffs that have been threatened in recent days.

But we also know many companies have actively taken steps to blunt the incremental costs of tariffs and work around potential disruptions to global supply chains.

We also know that companies have been reporting earnings that have exceeded expectations. As we assess the effects of tariffs and other challenges that may emerge, we should also be vigilant of the positive things going on that may help keep earnings growing — which in turn would support stock prices going higher.