Here Is The Source Of "More Than 95% Of The Market Rally In Q2"

Tyler Durden's picture


A few days ago we were pleased to crush any delusions that earnings - real earnings, not the farce of a Non-GAAP delusion in which Bank of America's $20 billion in litigation expenses in the past two years are added back to EPS as non-recurring items - in Q1 were strong. We hate to pop that particular bubble but, well, they were not as we showed on this chart.

Which simply means one thing: the relentless surge in the S&P500 continues not on the back of "solid fundamentals" as the straight to CNBC pundits will shout, but on even more hope for future growth, i.e. multiple expansion. Incidentally this is something even Goldman admitted when it said that "the stellar return in the S&P 500 borrowed heavily from the future." Incidentally, it was also Goldman who revealed that the entire nearly 30% surge in the S&P 500 in 2013 was due to, you guessed it: multiple expansion: "the S&P 500 has returned 22% YTD driven almost entirely by P/E multiple expansion rather than higher earnings."

So what about Q2: what is the source of the ongoing ramp in the S&P 500. Surely after one entire year of nothing but multiple expansion it should, at least now, be earnings, also known as fundamentals, right?


For the answer, we go to the following chart from UBS which explains that once again, and continuing the theme from 2013, in Q2 virtually all the upside in the S&P 500 has all been on the back of P/E multiple expansion!

What is another name for P/E expansion? Hope... and smoke and mirrors, non-GAAP of course.

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Thu, 07/17/2014 - 10:31 | 4967303 Bill of Rights
Bill of Rights's picture

Well all that printed money has to go somewhere.

Thu, 07/17/2014 - 10:35 | 4967322 JohnnyBriefcase
JohnnyBriefcase's picture

You're just jealous of this awesome fucking recovery!

Thu, 07/17/2014 - 10:39 | 4967334 Bill of Rights
Bill of Rights's picture

Lol, indeed, I for sure enjoy paying more for less.

Thu, 07/17/2014 - 10:50 | 4967382 Dr. Richard Head
Dr. Richard Head's picture

P/E expansion?  It's like a guy that first meets a girl and tells her how long his schlong is, only for the girl to find he is hung like a Yellen.

Thu, 07/17/2014 - 12:29 | 4968223 DavidC
DavidC's picture

I have the word 'Ludo' tattooed on mine....the only problem is when I get an erection it still says 'Ludo' and not 'Llandudno'....


Thu, 07/17/2014 - 14:06 | 4968980 boodles
boodles's picture

You must have used Arial Narrow font.

Fri, 07/18/2014 - 15:13 | 4974842 F0ster
F0ster's picture

P/E Expansion is like a Wonder Bra

Thu, 07/17/2014 - 10:32 | 4967306 RopeADope
RopeADope's picture

"What is another name for P/E expansion?"


Currency counterfeiting

Thu, 07/17/2014 - 10:37 | 4967325 Mr Pink
Mr Pink's picture

Stock buybacks? The good kind. The ones WE will be paying for

Thu, 07/17/2014 - 10:41 | 4967346 Pheonyte
Pheonyte's picture

You're looking at it wrong, it's the Price/Equity ratios that matter. Janet said so.

Thu, 07/17/2014 - 10:34 | 4967307 JustObserving
JustObserving's picture

95% of US GDP expansion for at least the last 2 decades has come from falsification of inflation.  So what's new under the sun?

Stock market participants might be in for a second quarter surprise. The result of many years of changes made to the official inflation measures is a substantially understated inflation rate. John Williams ( provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.

A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.

Thu, 07/17/2014 - 10:38 | 4967333 Racer
Racer's picture

Now that is more believable that all the fake 'adjustments'.

People who buy essentials know they get less and less for their money

Thu, 07/17/2014 - 11:01 | 4967421 optimator
optimator's picture

Racer, ask your neighbors if they know why they are gettig less and less for their money.  Its an eye opener. They haven't got a clue.

Thu, 07/17/2014 - 11:08 | 4967451 Government need...
Government needs you to pay taxes's picture

Another 10-20% cumulative price inflation for basic foodstuffs and folks near me are going to start eating squirrel pie.  I'm not joking.  Was speaking with a contractor recently, and he told me that 30 years ago, squirrel pie was considered a weekly staple.  Now, he said, you tell someone you are having squirrel pie, and they look at you like you're crazy.  A bit more price inflation, and we'll all be eating it . . . twice a week.

Thu, 07/17/2014 - 10:39 | 4967339 NoDebt
NoDebt's picture

That's being kind.  I could make the case there has been NO real growth in the US economy since the 1970s.  

Thu, 07/17/2014 - 10:33 | 4967311 order66
order66's picture

United States of Japan is on the way

Thu, 07/17/2014 - 10:51 | 4967390 JRobby
JRobby's picture

They still make a couple of decent cars though

Thu, 07/17/2014 - 10:36 | 4967319 John McCloy
John McCloy's picture


    The Primary dealers are buying stocks and bonds...AND THE GENTLEMANS AGREEMENT IS THAT NOBODY IS EVER EVER ALLOWED TO SELL UNTIL THE YEAR 2024..That is the cold reality...They must keep rates at 0% and steal through inflation UNTIL THE BILLIONS THEY LOST IN 2008 ARE RECOVERED..That is all it is..and they will lie and pretend and do anything they must to keep the plates spinning until they are recapitalized on the backs of us and our great grandchildren...0% FOR LIFE otherwise the entire thievery system and political looting on our dime unravels...

As Biggie Said: "What you think all deez guns is for?"

   DHS militarizing and preparing to put down the non Free Shit Army. Tyranny always is inherent throughout all of history..and has been the primary form of "government" since the year ZERO. 200 years was not a bad run for America. 

The Evil of men is coming..

Thu, 07/17/2014 - 11:04 | 4967435 eclectic syncretist
eclectic syncretist's picture

They don't give a shit about the eternal wisdom of Ben Franklin, thinking it doesn't apply to them.

Thu, 07/17/2014 - 11:05 | 4967437 ekm1
ekm1's picture

Correct. Multiple expansion, buybacks, all just minuscule compared to central banks and primary dealers buying and recyling electronic securities, the whome market

Thu, 07/17/2014 - 10:35 | 4967320 ekm1
ekm1's picture



My GDP estimations since May 2013:


USA, -4%


CHINA, -8%








WORLD, -5%


Unless oil goes down to $40-50 per barrell, this will be ongoing.

Thu, 07/17/2014 - 10:39 | 4967336 Pheonyte
Pheonyte's picture

Unless oil goes down to $40-50 per barrell, this will be ongoing.

LOL oil at those prices means game over man, game over.

Thu, 07/17/2014 - 10:41 | 4967342 ekm1
ekm1's picture

Rule of thumb:


Financial collapse is good, because it obliterates claims on real assets.


Financial collapse unchains the real economy.


We got to go down on our knees and pray God for financial collapse from time to time.



Thu, 07/17/2014 - 10:44 | 4967358 NOTaREALmerican
NOTaREALmerican's picture

Well,  lets say we want to pray for a financial collapse from time to time after we're dead. 

Thu, 07/17/2014 - 10:49 | 4967371 ekm1
ekm1's picture

Nothing bad happened in 2008. It was quite a positive event. Economy rebounded due to commodity price collapse.


We need a Triple 2008 now.


Triple Lehman

Thu, 07/17/2014 - 10:49 | 4967378 NOTaREALmerican
NOTaREALmerican's picture

That's because nothing DID happen in 2008.  

Thu, 07/17/2014 - 10:51 | 4967389 ekm1
ekm1's picture

Fine. Everything is about perspective.

It should have been allowed to crash a lot further.


No problem. It'll happen now, soon, inevitably.

Thu, 07/17/2014 - 11:02 | 4967422 NOTaREALmerican
NOTaREALmerican's picture

Well,  it didn't crash because The Fed answered the prayers of the top 0.0001%.    Praying is good,  especially if you can speak to the Deity directly.

Thu, 07/17/2014 - 11:03 | 4967429 ekm1
ekm1's picture

Agree. It was not a prayer though. It was an order from Obama, Reid and Pelosi/Boehner to the Fed.

Thu, 07/17/2014 - 11:00 | 4967419 Dolus
Dolus's picture

Exactly, it's funny that people still think that the dip in the S&P in 2008 was a correction. The FED freaked the fuck out and recapatilized thebanks with funny money like MBS buybacks. We are still right where we were in 2008 running in place in mid air. That Wiley Coyote realization hasn't sunk in yet. 

Thu, 07/17/2014 - 14:08 | 4969003 SAT 800
SAT 800's picture

Precisement, mon Cher.

Thu, 07/17/2014 - 14:55 | 4969323 caShOnlY
caShOnlY's picture

we already collapsed in 2008.  We are living off of the "reserve currency credit card" right now - soon to be taken away.

Thu, 07/17/2014 - 10:44 | 4967359 Pheonyte
Pheonyte's picture

Good, bad, or indifferent, collapse is on its way, but the carnage that will be left in its wake will be apocalyptic.

Thu, 07/17/2014 - 10:47 | 4967366 ekm1
ekm1's picture

Not at all.

You've bought into main stream propaganda.


Nothing apocalyptic about a financial collapse. Real economy rebounds immediately after it.


2008 was so good. Economy rebounded due to $40 oil.

Then obama comes to power and orders the Fed to print money for shadow banking.


Oil goes up again as a consequence.

Thu, 07/17/2014 - 10:51 | 4967385 Pheonyte
Pheonyte's picture

Financial collapse means food supply chains dry up, which means all food has to come from local sources. Ask yourself, who's prepared for that?

Thu, 07/17/2014 - 10:55 | 4967399 ekm1
ekm1's picture

Wrong. Quantitative Easing preventing the financial collapse means food supply is drying up due to energy starvation economy is going through right now due to shadow banking collaterizing oil for derivatives.


A financial collapse would extinguish financial claims on the food and energy supply chains. These claims are now clogging food and energy supply chains.


Thu, 07/17/2014 - 11:09 | 4967452 NOTaREALmerican
NOTaREALmerican's picture

Yeah yeah yeah,  but this is logic.


We're dealing with humans.   Nobody wants reality when fantasy is much better.

As somebody on here said in (about) 2009.     The situation is this:

Do you want to take one punch from Mike Tyson now and get it over with (reality) or do everything and anything to avoid that one punch now but when that fails you've got to take two punches.  EVERYBODY is going to try to avoid that punch (and create bullshit - aka fantasy - about how it will be possible).

Thu, 07/17/2014 - 10:56 | 4967402 Dr. Richard Head
Dr. Richard Head's picture

I agree.  Financial calamity is a clearing mechanism of fraudulant pricing mechanisms.  The problem is that the solution ends up being further rigging of those prices to the benefit of a few.  Imagine if housing prices would have been allowed to show true market value.  Mortgages and debt servitude would no longer be one of the gerbil wheels that the banksters force upon us.  I pray for a world where price discovery actually happens, as the value of true productive capital would be advantageous to the common man rather than the inflated prices of "assets", read liabilities, of the finacially connected oligarchy.

This system is so fucked up and forces the common man to run on the gerbil wheel ad nasuem, but trying to explain it to those not on ZH is like trying to explain to them quantum physics. 

Thu, 07/17/2014 - 10:58 | 4967407 ekm1
ekm1's picture

I'm having hard time to explain this to people.

People think Finance = Economics

This is so wrong


In reality:


Finance is simply the CLAIM on real assets, finance is the CLAIM on economics.

Thu, 07/17/2014 - 11:03 | 4967431 fonzannoon
fonzannoon's picture

This is how the economy works now. Go to the hamptons. Walk into any posh restaurant and the place is packed. Bottles flying around the restaurant. Loud laughter and banter. It's wonderful. Then leave there and drive 5 minutes. 

Few places illustrate the growing gap separating the rich from everyone else as starkly as the Hamptons, the summer playground for the have and have-mores.

In the Hamptons, the high cost of living is a challenge even for those considered middle class.

About 40 percent of Southampton children get free or reduced school lunches. A food pantry at church serves up to 400 clients monthly. And Southampton Hospital provides some doctors and nurses with housing because they can't afford to buy or rent there.

The charity Human Resources of the Hamptons assists 6,000 people annually through its food pantry, thrift shop and other services."

This is the new normal. We just need to maintain an effective and well paid police force to keep it going smoothly


Thu, 07/17/2014 - 11:06 | 4967448 ekm1
ekm1's picture

This occurs worldwide.

Venues close to financial centers and central government locations are closer to the money and get first taste of it.

Thu, 07/17/2014 - 11:10 | 4967458 NOTaREALmerican
NOTaREALmerican's picture

Survival of the fittests.   What better evolutionary trait than duplicity.    The system is working perfectly. 

Thu, 07/17/2014 - 14:29 | 4969158 Leopold B. Scotch
Leopold B. Scotch's picture

These people are not the fittest. They are looters. Nothing more. They are politically connected, and / or in a position to benefit from politically-connected outcomes of regulations, including those of the banking cartel.

Thu, 07/17/2014 - 11:19 | 4967520 kurt
kurt's picture

Oh Ducky! Listen to the little people squeal! Aren't those Southhampton people mostly "ethnic" undesirables? They'd never be let in the club, right?  Let's take the Mercedes on a drive around the lake. Can you believe "some" people think diesel is expensive? I like it when little people smell my exhaust. It's the least I can do. Ha! Ha!

Thu, 07/17/2014 - 11:23 | 4967555 game theory
game theory's picture

When I saw that Facebook sponsored a high-paid cop to patrol near their turf in Cali, I was reminded how the police are effectively employees of the rich and not public servants.  

Thu, 07/17/2014 - 14:12 | 4969023 SAT 800
SAT 800's picture

"The cops don't need you; and they expect the same from you"--Bob Dylan.

Thu, 07/17/2014 - 13:15 | 4968623 mtl4
mtl4's picture

Not sure why people are having such a hard time with this concept, you are spot on IMHO.  Most think that when the finance shell game stops so does production and then you have some apocalypse but obviously this is dead wrong.  What it does do, as you pointed out, is to extinguish the shadow claims that affect price manipulation and instead allow true capitalistc commerce to resume once again just as it has for hundreds of years.  The confusing difference this time is that we haven't seen this on a worldwide scale yet but there's absolutely no reason why this outcome would be any different.  

Thu, 07/17/2014 - 13:19 | 4968624 mtl4
mtl4's picture

It certainly won't be pretty when they need to mop up trillions in liquidity to prevent (assuming they can) the de-dollarizing of the world though.

Thu, 07/17/2014 - 11:11 | 4967460 kurt
kurt's picture

Big Oil killed retail starting in 2007. It is also responsible for a large part of unemployement and definitly the eviceration of the middle class. Remember how CNBC and other shills used to say, "retail is 70% of the American economy." Anymore, not so much. Don't hear it. It's a dirty little secret, not so fashionable. At the time of the original massive run up in gasoline prices there was actual litigation and complicity by the Whitehouse to conspire with Oil to drive the price UP! It's still in effect. Manipulation, smoke, mirrors.

Thu, 07/17/2014 - 10:42 | 4967343 LawsofPhysics
LawsofPhysics's picture

"Unless oil goes down to $40-50 per barrell, this will be ongoing." -


Let me help you out with that.  There are 7+ billion people in the world (and growing) all competing for a better quality of life and the calories available for consumption (not "potentially avialable calories" locked in the ground or otherwise) that make that quality of life possible.


Oil remains the primary source for dense transportable calories, period.  There is plenty of demand, so why would you expect the price in rapidly devaluing fiat to go down?

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