Stock Market Tsunami Siren Goes Off

Tyler Durden's picture

Authored by Wolf Richter via,

It will be ignored until it’s too late.

Everyone who’s watching the stock market has their own reasons for their endless optimism, their doom-and-gloom visions, their bouts of anxiety that come with trying to sit on the fence until the very last moment, or their blasé attitude that nothing can go wrong because the Fed has their back. But there are some factors that are like a tsunami siren that should send inhabitants scrambling to higher ground.

Since July 2012 – so over the past five years – the trailing 12-month earnings per share of all the companies in the S&P 500 index rose just 12% in total. Or just over 2% per year on average. Or barely at the rate of inflation – nothing more.

These are not earnings under the Generally Accepted Accounting Principles (GAAP) but “adjusted earnings” as reported by companies to make their earnings look better. Not all companies report “adjusted earnings.” Some just stick to GAAP earnings and live with the consequences. But many others also report “adjusted earnings,” and that’s what Wall Street propagates. “Adjusted earnings” are earnings with the bad stuff adjusted out of them, at the will of management. They generally display earnings in the most favorable light – hence significantly higher earnings than under GAAP.

This is the most optimistic earnings number. It’s the number that data provider FactSet uses for its analyses, and these adjusted earnings seen in the most favorable light grew only a little over 2% per year on average for the S&P 500 companies over the past five years, or 12% in total.

Yet, over the same period, the S&P 500 Index itself soared 80%.

And these adjusted earnings are now back where they’d been on March 2014, with no growth whatsoever. Total stagnation, even for adjusted earnings. And yet, over the same three-plus years, the S&P 500 index has soared 33%.

This chart shows those adjusted earnings per share for all S&P 500 companies (black line) and the S&P 500 index (blue line). I marked July 2012 and March 2014 (via FactSet, click to enlarge):

Given that there has been zero earnings growth over the past three years, even under the most optimistic “adjusted earnings” scenario, and only about 2% per year on average over the past five years, the S&P 500 companies are not high-growth companies. On average, they’re stagnating companies with stagnating earnings. And the price-earnings ratio for stagnating companies should be low. In 2012 it was around 15.5. Now, as of July 7, it is nearly 26.

In other words, earnings didn’t expand. The only thing that expanded was the multiple of those earnings to the share prices – the P/E ratio. Such periods of multiple expansion are common. They’re part of the stock market’s boom and bust cycle. And they’re invariably followed by periods of multiple contraction.

How long can this period of multiple expansion go on? That’s what everyone wants to know. Projections include “forever.” But “forever” doesn’t exist in the stock market. The next segment of the cycle is a multiple contraction.

The 10-year average P/E ratio, using once again the inflated “adjusted earnings,” not earnings under GAAP, is 16.7, according to FactSet. This includes two big stock market bubbles, the one leading up to the Financial Crisis, and the current one, but it includes only one crash. This imbalance skews the results. Two complete cycles would bring the average substantially below 16.7.

Nevertheless, even getting back to a P/E ratio of 16.7 for the S&P 500, when the current PE ratio is 25.6, would signify either miraculously skyrocketing earnings or a sharp contraction of the market. The first option is a near impossibility. And the second option?

Markets overshoot, which is what reversion to the mean entails: the average isn’t going to be the floor! And that’s why this type of unsustainably high earnings-multiple is like a tsunami siren where the arrival time of the tsunami remains unknown – and that’s why it is ignored until it’s too late.

Already, bankruptcies are surging as the “credit cycle” exacts its pound of flesh. Read… Consumers and Businesses Buckle under their Debts

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GunnerySgtHartman's picture

It will be ignored until it’s too late.

As it always is ... nothing new here.

cossack55's picture

Good writer.......I actually understood his meaning. Now I am really ascairt!!!!

rccalhoun's picture

the Fed/deep state will delay what has happenned to Japan 1987 to present (from happenning in the western economies) for as long as possible.  thats the best outcome.  the worst outcome is ww3.

The_Juggernaut's picture

I can sum up that article in one word: "Wolf!"

MillionDollarButter's picture

The wolf arives on Friday morning.

ParkAveFlasher's picture

The wolves are BTFD, gettin wolfier

HalinCA's picture

Algorithms are blind to these trivial concerns ...

MillionDollarButter's picture

We were not in a bull market.  BTFD = pig market.  This is about to become a wolf market.

GUS100CORRINA's picture

Any discussion without the inclusion of DEBT does not present the whole picture.

If DEBT was included in discussion and figure calculations, we would see that MANY SIRENS of ALL KINDS are going off everywhere!

Debt-leveraged buy backs have suppressed P/E expansion significantly. We are way beyond a P/E of 26! Corporate balance sheet debt is up 100% since z"OBOZO" took office.


undertow1141's picture

So you mean doubling your debt load to buy up your own stock price while you have stagnant/negative earnings growth is a bad thing? GO figure right.

Give us Stirling Engines's picture

They can keep this up so long as people don't sell. Once everyone attemps to sell their bonds/stocks/paper that will trigger inflation on real assets. 

At least make sure you're not holding the bag when it happens.

seataka's picture

I had a small service business, in 87 after thes tock crash, my telephone stopped ringing.
Everything stopped. for months..

El Oregonian's picture

It only looks bad when you look in to a mirror. Other than that, it all looks fine.

Stanley Kubrick's picture


It's just like the real estate 'market', it only goes up.

At least, that's what my local soccer mom REALTOR® told me.

troubadourcapital's picture

You do realize that valuations alone don't predict bull market tops right? Just because valuations are high doesn't mean that the stock market will fall. By it's very definition, the stock market will be above its average valuation half of the time

Mustafa Kemal's picture

"By it's very definition, the stock market will be above its average valuation half of the time"

average is not the same as "median"

yogibear's picture

Nonsense. BTFDs with 3x longs on the indexes. Be assured of out-right Federal reserve purchases of equities. Unlimited Fed backstopping. They are very scared of the alternative.

DC Beastie Boy's picture

Who fucking cares about earnings when the stock price is just made up?

stitch-rock's picture

Don't disrupt the grazing pasture with logic and rational thought!!

DC Beastie Boy's picture

Also, adjusted earnings?  Like "mark to fantasy" instead of "mark to market?"

Ink Pusher's picture

*Or , it's a bunch of marks being sold the sublime /sub-prime fantasy and the connected gangs of greedy myopic fools just can't seem to get enough.....

It used to be a "sucker born every minute" but with the invention of algos and quantum rigs the suckers P.T. was referring to; are now reproducing uncontrollably and exponentially by the nanosecond.

lulu34's picture

"Tick toc -- Tick toc".......

Snaffew's picture

meanwhile...the barkers on the floor are yelling..."Can we see 2450 on the S&P today!"

Publicus's picture

Admit it, we are entering an era of unlimited cheap energy and prosperities ahead.

gaoptimize's picture

Not until the institutional, regulatory, and Free Shit Army dead wood and underbrush is burned away in a very dificult period approaching.  Never the less, I do support the ideas Peter Diamandis presents in his book "Abundance".


rrrr's picture

That's spelled quant.

Racer's picture

Stocks are on a permanently high plateau's picture

Somewhat interesting data, but, I wouldn't bet the farm on earnings and PE ratio. 

buzzsaw99's picture



i noticed jpm was at 92 and change today.

stock buybacks trump earnings every time.

Cordeezy's picture

well when earnings season ends, it should be interesting.


VK's picture

Stocks will go up 4eva! Charge it to the FED EBT

Sliced into ribbons's picture

I love it! I am so fukkin rich right now!

onthedeschutes's picture

PE ratio??  Seriously...PE ratio analysis went out the window when the global central banks started buying stocks.  Your PE ratios mean nothing anymore.  Same for charts, technical analysis, fundamental analysis...they are all useless now.  So long as central banks are buying...the market will remain as it is...on an unabating upward trajectory...until the war starts.


yogibear's picture

Endless-round-robin central bank QE. It's the only thing central banks have left. Otherwise it's collapse. Rates are almost 0 now. Expect Feds balance sheeet to double several more times.

Righttoarmbears's picture

the real rate of inflation is way above the Government generated figure of 2% more like 7-8%  if you factor in all the bits that most government statistics conveniently leave out like rent and other things the normal people have to buy!! and P&E of 15.5 is pretty generous for a stagnant company, but then its all become  bit fantasy land of recent so do facts matter at all?

Gordon_Gekko's picture

When the currency (measuring tool) itself is broken, who can predict the accuracy or future of any prices? Just look at Venezuela's stock "market".

Fartboxbuffet's picture

Wheres the wave i want the fukin wave wipe it all out sick of this bullshit year after year

Rebelrebel7's picture

When I consider the Federal Reserve and people's backs, only knives come to mind.

CoCosAB's picture

When the number of FULL OF DEBT SLAVES reaches the TOP... Then the party starts!

True Contrarian's picture


Now where's my iphone. 

naro's picture

We know that there will be a pull back just as we know that nightime is coming.  But who cares. Just hold steady.

Full Court Lugenpresse's picture

But... that one guy keeps saying the Presidents Working Group on Markets (which has been around for decades LOL) makes it impossible for markets to ever fall...

bunkers's picture

When and how bad? When and how bad.

aztrader's picture

Thank God for NON-GAAP ACCOUNTING...........

any_mouse's picture

"Thank God for NON-GAAP ACCOUNTING..........."

Thank Moses that it's Generally Accepted to use Non-GAAP.

Herdee's picture

Wait for the parabolic blow off top?

idontcare's picture

33,000 then








.... unless the top is at 21, 666....


BTW, you do realize  (in numerology) that today's closing # of 21,532 is 13 which is "the number of upheaval so that new ground can be broken".  Whether that "upheaval" is revitalizing or destructive depends on the Karma of the system/individual represented by the #13.