The cape wearing, mean revisionists have predicted the world is going to go back to buggy whips because if you take 300 years of industrial age…
Sometimes things change and such change don’t mean revert, or you can rewind the clock. So I consider cyclically adjusted earnings only for cyclical industries like commodities. Not everything is going to mean revert, if it does, I would like my age and hair to mean revert.
More strawman arguments. Many on the board have argued that profitability (margins) might be permanently elevated; but the argument that they will continue to rise “forever” if of course impossible. There have been lots of discussions trying to explain the elevated margins - some of the explanations even make sense!
Earnings are cyclical … There are many folks argue the board is not a perma-bear… here is your prime example.
So, you’re saying…earnings aren’t cyclical?
I dare say, a few hundred million business people and stock investors will be very startled to learn this.
What I do know is, future is unknown, unpredictable, there are variety of outcomes possible and in most of those scenarios SP500 earnings is going to be far higher than pandemic low of $140.
FWIW, the pandemic low (rolling four quarters) was $94.13, not $140.
So the figure of S&P 500 earnings in the low $140s in 2023 suggested by extrapolating the real earnings trend would be 52% up from the pandemic lows, not equal to the lows.
I have no idea whether S&P 500 earnings will be $250 in 2023.
But if they manage that, it sure will be a lollapalooza of a result. (achieving the wildly improbable?)
$250 S&P 500 earnings in 2023 would correspond to total US corporate earnings being just over 16% of GDP.
(Using the fairly reasonable approximation that S&P 500 earnings growth is about the same as total US corporate earnings growth in this stretch)
That’s up about 37% from the current figures which represent the all time high in the Fed database back to the 1940s.
Have a look at what corporate profits at 16% of GDP looks like in context https://fred.stlouisfed.org/graph/?g=cSh
Let’s just say that 16% wouldn’t be my central expectation.
You are arguing against something that I didn’t say. Why?
Economy goes through cycles is something everyone understands. But even your cyclical lows can and are higher than past cycle lows’.
At the moment, economy is doing fine and 101 econ says inflation results in economic growth, or GDP growth. What we are suffering is high inflation, thus higher GDP. Predicting cyclically low earnings is not aligned.
I linked the numbers I use and you seems to be using different set of numbers. There are no 4 quarter rolling period where I see $95 earnings starting Q1 2020.
The way I see is 8% increase in 2022 from 2021 and another 10% increase in 2023 from 2022. We can apply that to the number you are using.
Perhaps you can provide your numbers reference. Without that, we are arguing apples and oranges.
So, you’re saying…earnings aren’t cyclical? … You are arguing against something that I didn’t say. Why?
Well, because you pretty much said it?
You said that the assertion that earnings are cyclical was a “prime example” of being a permabear.
OK.
So, either you don’t believe earnings are cyclical, or you believe being a permabear is a sound position to take.
Being a permabear is clearly an incorrect/nonsensical stance (we’re on the same page there), so by extension, I can only assume you don’t believe earnings are cyclical.
Or were you 'fessing up to thinking the permabears are right?
Either way–
No, believing earnings are cyclical isn’t being a permabear, it’s understanding how the world works.
In some years they’re really high, and in some they’re really low.
The main thing to understand is that neither one matters–only the trend level of earnings matters for the broad market.
That’s because only aggregate future earnings matter, and that future, though squiggly at short time frames, will have an average level which the trend line follows.
It’s certainly possible that 2023 S&P 500 earnings might come in at $250, however unlikely it seems to anyone but sell-side bankers.
But the bigger point is that it’s irrelevant–that’s definitely not going to be a point of the trend line, nor an indication of its future.
The average of the subsequent decade is going to be at least 20-25% lower than that in real terms even on optimistic assumptions.
(e.g., earnings continuing to rise faster than GDP, past their current record percentage)
There are no 4 quarter rolling period where I see $95 earnings starting Q1 2020.
Use the figures from Standard and Poors. That’s the actual figure for the four quarters to end 2020.
Google “sp-500-eps-est.xlsx”, check cell J142.
It’s the same figure as is reported elsewhere, e.g. Pinnacle, who reports based on a different methodology.
(Dow Jones data services used by Pinnacle reports the sum of known and published bottom-up trailing
four quarters as reported, whereas S&P’s figure is “profits earned during the 12 months ending on that date”.
The S&P figure is correct, but can only be known well after the date in question. The DJ method is “as known at the time”)
Well, because you pretty much said it? …or you believe being a permabear is a sound position to take.
WOW. You are attributing something I didn’t say, because you think I almost said it, and then goes one up syaing I believe in “permabear is a sound position”.
You are completely mischaracterizing what I said. Again, Not surprising, but why?
There are no 4 quarter rolling period where I see $95 earnings starting Q1 2020. Use the figures from Standard and Poors. That’s the actual figure for the four quarters to end 2020
OK. I use operating earnings, you used “reported earnings”. Fair enough. Here is the another set of data from SP500 Index provider. On the second sheet “Sector EPS” On cell CN8, you can see the earnings at $122.37. You can also see the expected earnings for 2021, 2022 & 2023.
For 2023, SP500 Index provider is estimating $240. My numbers are Yardeni numbers which are adjusted so, they are slightly higher. But $240 per share is far higher than $140.
Even the reported number for the first 3 quarters are $143.93.
Setting aside the numbers, the key point which you have not addressed is, the economy is expected to grow. The economy is so hot, the big worry is inflation not deflation.
Under these circumstances projecting cyclical EPS is going to be about what we did in 3 quarters this year, is a perma bear argument.
I’m no expert, but it seems to me that the technology sector (with it’s above-average margins and revenue per share growth rates) tends to occupy a larger and larger share of S&P 500 revenues and earnings with each passing year.
Your stereotypical tech centric investor probably expects this trend to continue (or accelerate) and reasonably expects future S&P 500 margins and growth rates to be materially higher than they have been in the past. No reversion to the mean. “This time is different.” They’re slapping a 25-30x multiple on $225-250 EPS for 2023 (13-14% net margins) and don’t think those earnings need any major cyclical adjustment downward. If you bring up US index valuation vs US GDP, they’ll tell you that indicator is meaningless due to increases in foreign sales in the Index. Price to sales ratios around 3x make sense to these folks, given the bright outlook. They’re expecting quite good returns for the Index from today’s price over the next 3 years.
Your stereotypical tech-shy value investor pretty much assumes a partial or full reversion to the mean for S&P 500 margins and valuations. For 2024, they’re penciling in something like maybe 10% net margins or $165 EPS on $1,650 in sales in 2024) and slapping a good old fashion PE of 16 or 18x on it to get a 3 year price target around 33% or more below today’s price. They’re seeing a large bubble and probably sitting on a lot of cash waiting for a major bear market. If you bring up US index valuation vs US GDP, they’ll nod in agreement. They will NEVER be foolish enough to pay 3x sales for the S&P 500.
If you bring up US index valuation vs US GDP, they’ll tell you that indicator is meaningless due to increases in foreign sales in the Index.
This is an argument with very strong underpinnings.
But, if you look at the actual size of the effect, it’s surprisingly small.
The S&P 500 always had a lot of export earnings.
It’s a larger share recently, but perhaps surprisingly, not all that much more.
One thing that’s easy to forget is that non-US firms are also increasing their share of value added in the US.
Globalization works both ways.
