It will be ignored until it’s too late. Everyone who’s watching the stock market has their own reasons for their endless optimism, their doom-and-gloom visions, their bouts of anxiety that come with trying to sit on the fence until the very last moment, or their blas attitude that nothing can go wrong because the Fed has their back. But there are some factors that are like a tsunami siren that should send inhabitants scrambling to higher ground.
Since July 2012 – so over the past five years – the trailing 12-month earnings per share of all the companies in the S&P 500 index rose just 12% in total. Or just over 2% per year on average. Or barely at the rate of inflation – nothing more.
These are not earnings under the Generally Accepted Accounting Principles (GAAP) but ‘adjusted earnings’ as reported by companies to make their earnings look better. Not all companies report ‘adjusted earnings.’ Some just stick to GAAP earnings and live with the consequences. But many others also report ‘adjusted earnings,’ and that’s what Wall Street propagates. ‘Adjusted earnings’ are earnings with the bad stuff adjusted out of them, at the will of management. They generally display earnings in the most favorable light – hence significantly higher earnings than under GAAP.
This post was published at Wolf Street on Jul 10, 2017.
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