How Real are Current S&P 500 Earnings?

Aggregate corporate earnings are the primary driver of stock market valuations and are communicated as “Reported Earnings” based on GAAP (generally accepted accounting principles) and “Pro-Forma” which exclude certain on-time or extraordinary items.  The problem is corporations are reporting these “special, one-time” items excluded from pro-forma earnings quarter after quarter leaving investors with an unclear picture of what the company is really earning.  This has led 90% of current earnings reports to be based on “pro-form” earnings with GAAP based earnings reported in the back of the quarterly report.  A couple decades ago it was the opposite, the majority of earnings reports were based on GAAP.  It is starting to sound like corporate America has taken a cue from the political class where manipulation, deceit and obfuscation rule the day.

Eventually the accounting trickery reach their effective limit and that point may have arrived.  2015 “pro-forma” earnings rose 0.4% over the prior year marking the weakest growth since 2009.  This is based on pro-forma figures.  GAAP earnings fell by 12.7% and the spread between GAAP versus pro-forma earnings is wider than anytime since 2009.

SP-500-Earnings-WorseThanRealized-022416

Another factor to take into consideration as the market tries to climb out of what has been a mild correction so far.

 

Posted in Fundamentals and tagged , .

Brian Dightman