Over the past month we have seen a veritable cornucopia of "worst since Lehman" announcements. And with 2015's first quarter earnings season about to be unleashed and lead to the first of at least three and likely more sequential Y/Y EPS declines in a row, we decided to give the "better than expected" Q4 earnings season - a season which would have been an absoolute disaster without the contribution of just one company - one last look. What we found was another indication that as we headed into year end we had, we just had another, you guessed it, "worse since Lehman" moment.
The following chart created using Deutsche Bank data shows total quarterly, non-GAAP EPS for the S&P. On the surface the number is great, because at 30.35 it has never been higher. There is, however, a big red flag lurking just below the surface and flagged on the chart below appropriately enough, in red. See if you can spot it.
Still don't see it? Here is just the red bar shown on a quarterly basis: it represents the amount of pro-forma EPS, and other non-GAAP writeoffs added to the bottom line which are not earnings in any conventional sense but merely accounting adjustments meant to boost the bottom non-GAAP line.
It should be much clearer now:
And here are the biggest "addback culprits":
As can be clearly seen above, the amount of non-GAAP addbacks boosting the S&P "earnings" to their latest quarterly high has never been greater. In fact, the last time the absolutely notional value of pro-forma addbacks was anywhere near this close was in the Lehman "kitchen sink" quarter, when companies took advantage of the biggest bailout in capitalist history, to square their fudged income statement and balance sheet with accounting reality, resulting in an addback that was greater than the actual GAAP print!
Worse, this shocking divergence is finally being acknowledged by the serious people. Here is Deutsche Bank: "Mind the gap: 2014 S&P GAAP EPS is $102 or 86% of $118 non-GAAP EPS." This is the highest share of pro-forma addbacks to the EPS line since, you got it again, Lehman.
It also means that on a GAAP P/E multiple basis, the S&P is trading well above 20x!
More improtantly, if only looks at the only trend that matters, tht of GAAP, unadjusted, unfudged earnings, Q1 2015 will not be the first quarter that posts a Year over year decline. In fact, on a GAAP basis not only are 2014 EPS lower than 2013 (down 4.3% from 107.4 to 102.8), but there have already been three quarters in the past year in which GAAP EPS was lower.
The only difference is that now, with all possible non-GAAP addbacks having been exhausted, for the first time since Lehman we are actually going to see a non-GAAP EPS decline, and then another, and then another. Because, as we warned in December, the US is now in a profit recession which, as also shown here last week, explains why the US economy itself has also likely in a full blown economic recession as well.
And now, with all that said, bring on Q1.