I tuned in to CNBC this morning (big mistake) and learned that the stock market is up because of strong earnings and it’s going higher because of even stronger earnings to come. I should not do this to myself at my age. The sheer audacity of this lie almost gave me a heart attack.
Wall Street’s analysts have penciled in a year-ahead earnings boom that is not in the slightest plausible. With 84% of the S&P 500 having reported Q2 results, earnings over the last 12 months are still 1.3% below where they were in September, 2014.
That’s right. Nothing has happened to corporate earnings in the last three years except a collapse in earnings and subsequent recovery in the energy/materials/industrial sector. After hitting $106 per share in September, 2014, S&P 500 earnings declined to $86.44 per share in March, 2016 in response to oil prices in the low $30s. Oil has since recovered to the $50 dollar area, bringing S&P 500 earnings back to $104.61 during the current quarter. Thanks to David Stockman for the numbers.
CNBC barely mentioned that earnings were down so now they can tell you that they are up when in fact they have simply returned to past levels. I bet that not one in 10 CNBC watchers know this.
What has actually happened is not earnings growth but rather earnings multiple expansion. At 1972 in September 2014, the S&P 500 was trading at 17.2X. At the slightly lower profit level now recorded for June 2017 ($104.61 per share), the index is valued at 23.8X.
To defend the current run in stocks, Wall Street is projecting nearly $133 per share of GAAP earnings for the S&P 500 for the 12 month period ending in December, 2018. That’s a surge of 27%…more than the 23% recorded over the entire past decade. How does the three-year round trip to nowhere in earnings that we have just experienced suddenly take off into the stratosphere in the context of an aging business cycle, immense global headwinds and an unfolding disaster in Washington?
Valuation matters. If earnings actually do go higher (which I doubt) we would hopefully see a lower earnings-per-share multiple which would put a little more of a safety net below the market’s outrageous valuation. Given the fact that we are very late in the economic cycle, there is no plausible future from here that is worth 24X earnings on the S&P 500 or 96X on the Russell 2000.
In short, none of this makes sense. The stock market is going up because it is going up, not because of earnings.
Here’s a fascinating statistic about the current state of the market courtesy of Deutsche Bank’s Jim Reid. We have just had 13 successive days in which the S&P 500 has moved less than 0.3% in either direction. The last time we had 13 consecutive days in which the S&P moved less than 0.3% in either direction was… never. The second longest streak was 10 days which has happened twice in history, in 1966 and again in 1961.
It is now 73 trading days since the S&P increased by more than 1% in any one day. Earlier this year, the Dow recorded its lowest one month trading range since the year 1900.
This is not normal, dear reader. The markets are trying to tell us that there is something seriously wrong. Are you listening to the markets or CNBC?