We have previously observed that while pundits are happy to focus on non-GAAP earnings which over the past several years have become a total farce, the reality is that GAAP EPS for the S&P in 2014 will be 1.3% lower than a year ago, and that as a result of crashing energy company profits, 2015 GAAP EPS will be lower still, meaning that contrary to the propaganda, the US will see two consecutive years of declining wage growth. That said, not even we expected to read the following shocker revealing just how naked the corporate profitability emperor truly is, and coming from the world's largest asset manager on top of everything.
Presenting the stunning punchline from Blackrock's 2015 Investment Outlook:
Corporate earnings are a key risk. Analysts predict double-digit growth in 2015, yet such high expectations will be tough to meet. Companies have picked the low-hanging fruit by slashing costs since the financial crisis. How do you generate 10% earnings-per-share growth when nominal GDP growth is just 4%?
It becomes tempting to take on too much leverage, use financial wizardry to reward shareholders or even stretch accounting principles. S&P 500 profits are 86% higher than they would be if accounting standards of the national accounts were used, Pelham Smithers Associates notes. And the gap between the two measures is widening, the research firm finds.
So assuming 126 non-GAAP, accounting-levitated 2015 S&P consensus EPS, this means the real EPS is... 67? Which in turn means that the real forward P/E as of this moment is over 30x!
Then again, judging by the buying frenzy being unleashed in the S&P, it is time to BTFATH with both hands and on margin, because as long as nobody admits the truth, one must buy, buy, buy.