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 [2]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 [3].
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 [4]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 [5]: "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?
Wrong.
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!
[6]
What is another name for P/E expansion? Hope... and smoke and mirrors, non-GAAP of course.
