The Truth About First Quarter S&P 500 Earnings

Tyler Durden's picture

The last time we looked at real, GAAP, not "pro-forma" non-GAAP EPS, in November of last year, when the S&P 500 was just over 1800, we found that on an LTM GAAP basis, the market was trading at a whopping 19x P/E LTM - a number which all but the most dyed-in-the-wool permabulls such as Janet Yellen, would call significantly overvalued (and which even JPM reported was higher than 89% of all P/E prints in the history of the market).


What happened next was remarkable: following a uniform change to pension accounting, which helped "revise" US GDP by $500 billion higher, said revision also flowed through to reported corporate earnings, not just non-GAAP EPS but also GAAP, and EPS for the S&P500 were revised retroactively higher virtually uniformly by about $1.5 per quarter. This revision is shown on the chart below.

This is notable because it means that LTM GAAP EPS for the S&P500 were pushed higher from roughly $100 to $106 as of March 31.

In other words, had it not been for the pension accounting fudge which helped raise LTM S&P 500 GAAP EPS from $100 to $106, the P/E of the S&P would be nearly 20x as of Q1. Nonetheless, even on a "revised" GAAP basis, taking full benefit of pension accounting revisions (revisions which are only possible due to the S&P500 being at record highs, something which reflexively is only possible because valuation gimmicks such as this one!) the S&P is still trading at a nosebleed 18.5x LTM P/E.

So how does GAAP EPS compare to that perpetually fudged, Non-GAAP EPS - used excuslively by overzealous management teams and sell-side analysts to "justify" quite ridiculous valuations "when one excludes one-time charges, restructuring items, and so on." Like fore exammple Alcoa's perpetually recurring, "non-recurring" charges or JPM's now constant "one-time" legal addbacks. The delta between the two is shown in the chart below:

On an LTM basis this means that the choice of GAAP or Non-GAAP for the S&P 500 is equivalent to 2 turns of LTM P/E: 16.5 vs 18.5.


Backing up one chart, observent readers will notice something peculiar: in Q1 GAAP earnings tumbled while Non-GAAP earnings maintained an exuberant upward trajectory. Sure enough, anyone curious how real, GAAP EPS performed in the just completed quarter, should look at the chart below. It shows that GAAP EPS (helped by a record amount of corporate buybacks) in the first quarter of 2014 actually dropped 2.2% from Q1 2013 even as Non-GAAP suggested a nearly 5% increase!

As noted, this is happening even as corporations bought back a record amount of their own stock in Q1, reducing the S in the EPS, and thus artificially boosting the overall EPS number. One can only imagine how much worse the decling in EPS would have been had stock repurchases slowed down:

How does one explain the dramatic surge in Non-GAAP EPS compared to GAAP? Simple: supposed "one-time" Write-offs. This is what Deutsche Bank has to say about the topic:

Common items excluded from non-GAAP EPS are goodwill impairments, restructuring charges, merger costs, gain/loss on assets sales etc., which tend to be cyclical. Hence the difference between GAAP and non-GAAP EPS is largest during recessions and ~10% ex. recessions.

It is thus not surprising that the "write-off" difference between GAAP and Non-GAAP surged in Q1 2014 to 2.9: the highest since Q4 2012 when EPS once again slumped and the Fed was brought in to launch QEternity. In fact, excluding the two quarters prior to the launch of the latest round of QE, the number of "addbacks, write-offs and restructuring charges" has never been greater since the Lehman failure.

The bottom line is that the LTM P/E for the S&P 500 is therefore one of three numbers:

  • 16.5x on a non-GAAP basis.
  • 18.5x on a revised GAAP basis, or
  • 19.5x on a pre-revision GAAP basis, when corporations do not take the "benefit" of a pension boost to EPS which is solely the result of record high stock prices courtesy of a Fed and HFT-manipulated market.

Readers can make their own choice which number to use based on their own particular bias.

As for corporate revenues and CapEx... fughetaboutit.

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CrashisOptimistic's picture

No one is going to focus on this, or even talk about it, anywhere but here.

I am reminded of the rationale for eliminating mark-to-market.

"If banks are forced to report their MBS holdings at their market value, they will all be bankrupt.  This would be beneficial to no one at all.  So that is not what we will force them to do."

RaceToTheBottom's picture

MTM would be the best thing for the bankstering 5-10 years.

Therefore it will not happen

max2205's picture

There is a GAAP between FASB's ears

Tabarnaque's picture

Then add prostitution, drugs and criminality to national GDP's and problem fixed! The economies of the Western World have finally reached escape velocity! The algos will push the S&P to a new all time high (for another 5 minutes).

Colonel Klink's picture

Precisely, change the rules when the game is up.  Calvinball economics!

Suspend the FASB rules which have been in place for many years as the standard, when following them would reveal the ponzi.  All permitted by CONgress and Executive liedership (sic).

Caviar Emptor's picture

Yes. Pretend that the System is still humming , when it is barely sputtering. Gotta admit, they did a pretty mean job of whitewashing the Q1 contraction. I heard an MSM "biz report" on the air this week that stated that "Growth Slowed in Q1" :)
We will just get more of the same: biflation will grind the economy down to a nubbin.

NoDebt's picture

When numbers on a screen say "game over, you're effed", the numbers on the screen will be changed.  I've noticed it's happening with increasing frequency the last few years.

TVP's picture

We are told the banks must survive at all costs, otherwise we're all doomed.

In reality, the banks must FAIL at all costs, because right now we're all doomed.



AccreditedEYE's picture

Even if they did, the common reply is 19.5 times still isn't a "stretched" valuation by historical standards AND hyper-growth that is around the corner will quickly correct this seemingly short-term overvalued market.

Realize this: you simply cannot win.

Da Yooper's picture



We take out all the hype -  rigged numbers - manipulated numbers - screwy accounting practices


none of the above would be even in the ballpark


we are so screwed

CrashisOptimistic's picture

Which is why I tell people frequently:

1) Don't short.  Don't long.  Don't play.  Buy farmland, even if you live in a fucking city, because you won't much longer -- if you live at all.  Farmland is the only thing that is real, and your risk with it is that you lose it, which is much less risk than any other alternative.

2) Stop expecting money issues to generate a collapse.  They never will.  They will be redefined at whim, for the noble purpose of keeping the system intact.  But they'll fail because of oil, and only because of oil, because oil scarcity is what is forcing all these other matters.

TVP's picture

Right, money issues have NEVER caused social unrest or a collapse, never in history.


As long as you don't count Zimbabwe, Weimar Republic, Soviet Union, Argentina, Venezuela...


One major difference is that the dollar, as reserve currency, remains tied to ALL OTHER CURRENCIES.  So when it loses reserve status, $9 Trillion or will come come to roost, and the value of the dollar will drop in proportion to the massive increase in supply and decrease in demand.  All other currencies will follow, assuming they don't fail first.


Magooo's picture

Caveat --- buy farmland that is NOT famred using petrochemical inputs --- buy only farmland that is farmed using organic inputs.  Industrially farmed land is DEAD and will grow nothing without the chemical inputs.



Bemused Observer's picture

Yeah, well, I'm creating my OWN reality. And no one can come in unless I say so. And I can throw you out whenever I want.

Plus, I get all the candy...well, you can have the Mary Janes, but everything else is mine.

In MY reality, if you try to take any of my stuff, I get to zap you with my laser eyes. (And don't think I won't DO it!)

In MY reality, my breasts are so large that extra letters had to be added to the alphabet in order to name the cup size.

I was supposed to go on Jeopardy, but Alex Trebeck cancelled me at the last minute because he was afraid of my giant, pulsating mega-brain. What a pussy, huh?

I LIKE this game!

Dr. Engali's picture

There you go looking at the fundamentals again Tyler. What did we tell you about that silly antiquated concept? 

NoDebt's picture

GAAP vs. Non-GAAP number fudging is what passes for fundamentals now?  Yeow!  We've slid considerable further down the slippery slope than I feared.

Just kidding.  I know what you meant.

kenezen's picture

The S&P is a great international market with very little industrial or manufacturing substance coming from America. The name are familiar but, that's about it! I wish it wasn't so!