Overly optimistic expectations are commonplace in non-recessionary periods, and confirming what we discussed here [2], estimates have continued to decline over the past few quarters while markets have pushed higher. In fact, as JPMorgan notes, and despite the protestations of the commission-takers, S&P 500 EPS are now forecast to be less than they were at the previous peak in 2007/2008. Of course, the multiple expansion argument comes to save them but we note that given where we are in the profit cycle with margins at their current levels (as discussed here [3]) the majority of earnings growth moving forward must come from revenues rather than margin expansion. Revenues for the S&P 500 have historically grown in-line with nominal global GDP, so let's hope that FDX, CAT [4], and ORCL are all one-offs. So given indices are at all-time highs but EPS expectations are well below the previous peak - we wonder just how this market is deemed 'cheap'?
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