For some reason, investors' goldfish-like brains forget every quarter that time and again around 70% of names beat expectations and this fact is used as reason to buy buy buy. Certainly this time around, earnings beats are well within historical norms and furthermore are simply beating significantly lowered expectations. However, that is backward-looking and no matter what metric you use for valuation, the only one that really counts is how expectations are priced into the market. With regard to this, 12 Month forward EPS expectations have started to roll-over quite significantly for the S&P 500 (at around a -8.5% annualized clip) - the last time we saw this was Q4 2007 and we know how well that ended.
Actual S&P 500 earnings are 4.15% above previous peak levels and expectations for the next 12 months are 4.76% higher than at their previous peak level. Note that CPI rose 7.9% during this period so we are actually seeing earnings drop (admittedly that is USD CPI versus a rebased USD earnings number from global revenues). What is also interesting to note on the chart is the growing divide between expectations and actual earnings as we rallied - with expectations rising faster and faster - it seems reality is starting to set in to expectations and perhaps multiples might also start to reflect that soon.
The key for us is the start of what is evidently a rolling over in forward expectations for earnings. As stimulus roll off, this is hardly surprising and perhaps is a better fit to our parade of sentiment based indicators than a 'manufactured' GDP print which will be revised again and again over the next few months. Critically, the pace of the drop in forward EPS is rapid and while many will argue that containing the European risk premium puzzle may be the solution, it seems that growth will continue to lag in Europe, China growth will be 'carefully monitored', and without some miracle the super-committee is hardly likely to deliver anything other than a low/slow/no growth inducing fiscal effort in the US.
hat-tip John Lohman