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Q1 GAAP EPS Lowest Since 2012: The S&P500 Is Now Trading Over 20x PE Using Unadjusted Earnings
For years we had been covering the steady divergence between plain vanilla GAAP EPS and their "as adjusted" non-GAAP comparable, a number which accountants generally frown upon and which investors love as it always shows a far rosier earnings (and cash flow) picture than is in reality. Lately, this divergence rose to a level not seen since the financial crisis when as we showed recently, non-GAAP addbacks accounted for a quarter of the entire Q4 non-GAAP EPS of the S&P500.
Then, with the usual several year delay, the mainstream press figured out that an ever greater amount of corporate "earnings" is totally bogus. This is what the AP's Bernard Candon wrote last month in a reported titled "Experts worry that 'phony numbers' are misleading investors":
"as the stock market climbs ever higher, professional investors are warning that companies are presenting misleading versions of their results that ignore a wide variety of normal costs of running a business to make it seem like they're doing better than they really are."
The financial analysts who are supposed to fight corporate spin are often playing along. Instead of challenging the companies, they're largely passing along the rosy numbers in reports recommending stocks to investors.
"Companies are tilting the results," says fund manager Tom Brown of Second Curve Capital, "and the analysts are buying it."
An analysis of results from 500 major companies by The Associated Press, based on data provided by S&P Capital IQ, a research firm, found that the gap between the "adjusted" profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years.
At one of every five companies, these "adjusted" profits were higher than net income by 50 percent or more. Many more companies are in that category now than there were five years ago. And some companies that seem profitable on an adjusted basis are actually losing money.
So some are finally paying attention.
Others, however, those few who keep piling into tech stocks where the non-GAAP euphoria is worst, are openly refusing to accept a reality in which companies that are reliant on advertising dollars are expected to grow massively over the next decade, even as an economic recession, one which the Fed's rate hike will guarantee, is sure to crush advertising spending and clobber cash flows of the bulk of social media stocks.
Meanwhile, this is what the numbers say: according to the latest GAAP EPS data from Q1, in which a quarter of companies have already reported, GAAP EPS will coming in just shy of 23, a decline of 9.2% from a year ago, following the brutal 17.2% collapse in GAAP EPS in Q4, a quarter in which non-GAAP addbacks made the adjusted EPS number be a 4.7% increase!
But what is worse, is that those who ignore non-GAAP adjustments, are about to observe the worst quarter since 2012: the 22.98 in Q1 EPS will match the lowest quarterly EPS print of the S&P500 since Q3 of 2012!
And keep in mind all of these disappointing non-GAAP and GAAP EPS take full advantage of over half a trillion in corporate stock buybacks in the past year, drastically reducing the "per share" number in the EPS calculation.
But how is this possible when everyone is saying earnings continue to rise? Simple: the bullish case is revealed in the non-GAAP addbacks, which are highlighted in red in the chart below:
Showing just the addbacks (with the final Q1 number certain to rise above the 7.4 EPS benefit in Q4 when the remaining 75% of companies report earnings) we can see that the latest 2 quarters will have the greatest amount of "one-time" non-GAAP addbacks since the crisis.
Finally putting it all together, here is the LTM GAAP and non-GAAP EPS, and the resultant P/E ratios for the S&P on a 2015 forward basis (using Deutsche Bank's optimistic growth forecasts for the rest of 2015 which have Q4 2015 GAAP EPS projected to grow 23% from lastt Q4).
As of this moment, with the S&P500 at 2130, the S&P 500 is trading at 18.1x forward (non-GAAP) PE based on 2015P EPS of 118, and an unprecedented 20.3x GAAP PE if one uses the far more realistic 105 GAAP EPS.
Which one is real? It depends on whether readers believe that 18 points of S&P 500 "earnings" in the last 12 months (just under 20%) which comes from "one-time items, addbacks and other charges" are a credible "adjustment" to make to the earnings of the world's biggest stock market. But think of it this way: 18 S&P point in the last 12 months are from addbacks, "one-time items" and non-GAAP charges. Applying an 18x multiple, this means that 325 S&P500 points is purely due to accounting gimmickry, ignoring all the other stuff about margins, revenues, buybacks, commodities, China and all the "other" topics pundits waste their time debating every day.
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-5% interest should get us to 50 PE
Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj)
2015:Q1: 1,406.4 Billions of Dollars (+ see more) 2015:Q1: 1,406.4 2014:Q4: 1,542.5 2014:Q3: 1,568.3 2014:Q2: 1,498.2 2014:Q1: 1,379.8 Quarterly, Seasonally Adjusted Annual Rate, CPATAX, Updated: 2015-06-24 8:06 AM CDThttps://research.stlouisfed.org/fred2/graph/?g=1tJe
Last time the recession started 6 quarters after the peak. Our most recent peak was 6 quarters ago.
How timely.
And for an extra bonus. what was the Fed Funds Rate the last time we were at this point?
This is going to get exciting really fast from here on...
Yep, NOT a bubble, move along now, nothing to see here
What could possibly go wrong?
As long as Kevin Henry is buying
Reality is a dish best served [ ].
"Where else are you gonna put yer money?" Drink.
S & P within striking distance of all time highs right now...
Just BTATFH and shut it morons!!
ZHers (mee too) lost 2% in gold and I'm pissed. I want to fight.
This is what happens when compensation is linked to stock prices. You'd think we would have learned our lesson the last crash.
Actually this is the worst year over year quarterly performance since 2009.
The recession has started and the Fed still fantasizes about traction and growth.
It is likely the recession has started, probably just a garden variety inventory recession this time, maybe morphing into a balance sheet recession later.
If one uses the 7/16/2015 Silverblatt spreadsheet from S$P and the S&P cash index value 2129.38 which is what it was when I just did the calc, you find Operating earnings P/E of 19.10 on TTM or 21.45 on as reported earnings. Now thats through the latest fullly reported quarter. Thos numbers go up to 19.24 and 21.86 if you use the estimates for Q2 which is currently being reported.
I have to disagree completely with this just being an inventory recession. The rate of profit growth improvement for this last recovery was not only shorter in duration but poorer in quality to boot.
The 5 year CAGR peaked in 2006 at 16.48% for Business profits after taxes.
Our current cycle peak for 5 year CAGR peaked in 2014 at the end of the first quarter of 2014 at 10.11%.
With the shorter and shallower recovery, businesses are not in shape for any recession.
What will the DOW 30 profits do for 2015? Right now with half the year in the bag, profits in total dollars will be down 8.16% from 2014, the worst performance since 2009, and twice as bad as the performance in 2008.
Even worse, what do we see on the horizon that is going to suddenly jump start the profit cycle?
Absolutely nothing.
The proof you are correct is the "Christmas in July" has actually began with the largest Online retailer, Amazon, and the largest brick & mortar retailer, Walmart. Can't wait to see how the Christmas season is blended in with Halloween & Thanksgiving at the same time. The vendors will have to get very creative with the displays given the limited store space. Use that cart to clear an area if they have too many displays in your way...kidding on the latter.
I always thought you had to get out of the one you have been in before you could enter into the new one; things really are surreal these days.
They are just trying to manage the timing of it so that they can appear blameless.
Enjoy! A Congressman grills "Old Yeller" - priceless. (3min 12 sec) https://www.youtube.com/watch?v=oogL0YGvyyk
The higher & farther chicanery ascends, the masses must be 'on board' to survive. All or Nothing now.
Q2 earnings look to be much better, based on reports so far. Lots of big beats.
Name at least 5 companies including their total earnings growth (not the BS of EPS) and their revenue compared to a year ago.
Oh....you can't....
Well, the my comment is comparing Q2 with Q1, and the post is about Q1 not YoY.
So, for example. Halliburton' beat on the top, and beat on the bottom by 50%. Hasboro beat on both, and earnings by 15%. Citi had its biggest profit in 8 years. Lockheed beat on both, and earnings by 10%. And then there was Google.
The issue is about earnings and valuation. Why would you not care about EPS? So what about buy backs, as long as I own the outstanding shares.
Lowered expectations is the reason.
I look at companies such as LinkedIn and just shake my head. The company is running negative GAAP ttm earnings of $0.37 and all of the sell-side (they all seem to be sell-side) analysts keep talking B/S adjusted earnings.
This sure seems to be a clear case for creating a price to make those in control of price rich and then come up with a story that rationalizes it afterwards.
The only thing that matters is price... and that is how fraud is committed.
bullish
Everyone who expects S&P earnings to have a 20% or greater forward earnings growth rate please stand up.
I'm not standing because I have no legs, but I do expect the "paper earnings" to reflect it only if the Goldman-Sachs gang gives it a "Second" or confirmation.
Is this what is called a triple top in the stock market.... unable to post chart.. but look at the S&P 500 from 1950-2015.
Are you telling me the 70 degree angled ascent in price the market is seeing on the daily log chart is unsustainable?
Well Apple is only up 2% going into earnings so maybe the top is in. If it is up less than 10% tomorrow I am gonna call it a down day.
I would short the APPL because everytime it moves this fast before earnings announcement; it come back to earth...not that history will repeat itself. This past January, when apple smashed all previous "records"; it lagged 4-6 trading days before it topped. Anyway; it is only one persons opinion.
Apple is probably the only tech company that I would *not* short today. Pretty much every other company though is fair game.
The markets in the us, both bond and equity, will get a "real" boost with the destruction of the EU and current "crisis" / "correction" of the Chinese markets. That may be the reason for the VIX being hammered last week and precious metals & other commodities on Sunday (makes equities look like the place to be in "appearance"). The US will be the best looking "dead-horse" in the race. Unless the "Dark-Pool Shadow Banking System" completely looses its vice-grip, then anything can happen.
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As a side-note; I receive and email from *Quality Silver Bullion and they have suspended orders for several reasons, one being supply uncertainty, and I did some checking to see if their are widespread issues and there are beginning to show some shortages with the US Mint Canadian Mint and private Sunshine mint. How much more will this gap increase with "flash crash" of commodities? I'm not advocating precious metals except to the extent that it is good to have some in preferably sovereign coins & bars imo and 10-20% of portfolio. * https://qualitysilverbullion.com/
The site is bias toward "silver", but the links do show the reality. http://www.silverdoctors.com/tag/us-mint/
Way off topic...my apologies. (edit)
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There is a saying "if it works to well, then get rid of it".