When you see mushrooms growing out of the trunk of a tree, it may be a sign that tree is rotten. Often, once I see mushrooms emerging through the bark, I know that the core of that tree is completely hollow and the tree needs to be taken down (especially if it is near a house).
Why are mushrooms on the bark a signal that a tree is decayed?
Fungi are not plants, but they have some similarities. To better understand them, think about the mushroom as a fruit and the mycelium as the roots, branches and leaves of the fungus.
The mycelium grows within the tree. As a process of taking nutrients from the tree, it breaks down the wood and causes rot.
Only once one the wood-rotting fungus has grown throughout the tree will a mushroom appear. When you plant a apple tree, you don't get any fruit for the first few years- it takes time to grow and mature into a tree that can support the apples. A fungus has to mature before it can reproduce as well.
Like an apple, a mushroom's role is to make seeds (spores) and reproduce. A mushroom is a signal that there is a mature, thriving fungus growing inside of a tree.
You can see in the image above that the bark of the Palmetto does not cover the trunk all the way to the ground. The tree has been damaged by cars and lawn mowers at the base- this damage allowed an entryway for the fungus and now the tree is dead.
If you see a mushroom growing out of a large tree on your property, check to see if there are any signs of decay. Consult with an arborist or plant pathologist to determine if the tree needs to be removed or if it can be treated and saved.