Over the past few weeks, virtually all of the empty chatterboxes on financial comedy TV have been repeating ad infinitum just how much cheaper the market now is compared to its prior peak in 2007 because, get this, it trades at “only” a 15x multiple compared to the 18x or so reached at its peak in 2007. By doing so these same hollow pundits simply confirm just how painfully clueless their cheerleading is, as the market, or what’s left of it in the “new Bernanke centrally-planned abnormal“, never trades on current earnings but always future discounted EPS, or in other words, forward P/E, or any other valuation, multiples. And it is when one looks at the future on an apples to apples basis, that the market now is more expensive than it was back in 2007!
As the chart below shows, specifically the red dotted line, the 2013 S&P 500 consensus earnings, which have obviously been declining for the past year from 120 to roughly 110, are now less than what 2009 consensus earnings were at the peak of the market in 2007, when they, too, hit some 120 in Earnings per share. In other words, on a forward multiple basis, in 2007 the market was cheaper than it is now as earnings were supposed to go up virtually parabolically, from under 90 for year end 2007 to 108 for 2008 and 120 for 2009.
Just as notable is the full year 2012 earnings which too were supposed to soar to nearly 120 as recently as 2010, instead closed at the very lowest of the forward projection series, or just about 100 in S&P500 EPS. Putting this number in historical perspective as the blue line shows, back in 2007 the Wall Street consensus was expecting that 2008 earnings would be higher than where 2012 actual earnings will close the year.
Of course, what ended up happening was vastly different, and both 2008 and 2009 actual earnings imploded from their peak estimates of 110 and 120 to approximately 65 and 60, or were literally cut in half as the Great Financial Crisis destroyed not only the corporate bottom line but all hopes of multiple expansion.
And now we are back to forecasting a massive growth in the future, which as history has shown time and again, ir rarely if ever attained. But that is what the sell-side lemming crew is taught to do: draw upward sloping arrows and goalseek their models to fit an artificial regression line.
Yet what the second chart below shows is that when one normalizes for the recent historical pattern in earnings, the consensus 2013 earnings forecast will once again be a major disappointment, and will end up being drastically reduced. In fact, if one extrapolates the inverted curved yellow line of what actual S&P earnings have been in recent years, it is very likely that not only has the broader economy peaked, but so have corporate revenues, margins and earnings, and at this point any profit growth will be very limited at best.
Finally, slamming the door shut on the future hope versus current reality myth, Goldman’s latest Q4 earnings tally reminds us that with over 80% of Q4 earnings season done, EPS is now expected to decline by 1% relative to Q4 2011, (when Europe was imploding (as usual), and when the global central banks had to bailout the world once more). Some other observations:
- Trailing four-quarter margins declined in almost every sector. Index-level margins look stronger excluding charges but are still below last year’s peak.
- Management guidance for 1Q 2013 is more negative than usual. 78% of companies guided down versus consensus estimates (versus 68% historically).
- Full-year margins fell by 30 bp versus last year with declines in almost every sector. The largest margin declines came from Telecom Services, Energy, and Materials. While Information Technology margins declined by 46 bp versus 2011, 8% sales growth resulted in relatively strong earnings growth of 5%.
- Bottom-up consensus expected 2012 EPS of $107 one year ago. This is 5% higher than realized results comparable to those estimates. A -5% revision is in-line with the median historical revision since 1984
- Bottom-up consensus forecasts $112 of EPS for 2013. Consensus already lowered estimates by 1% in 2013 with the largest declines in Health Care and Information Technology earnings estimates.
Who performed best? Why the one group benefitting most from trillions in excess reserves, and which is full to the gills of fake earnings like one-time items, non-recurring non-cash charges, and of course: loan-loss reserve releases rarely if ever matched by the need to raise provisions for the coming avalanche of lawsuits against all banks:
- The Financials sector reported the strongest year-over-year growth in 2012. Financials EPS grew 7% versus 2011
Finally, for that most trotted out metric that companies are “beating expectations” – here’s why: since the start of earnings season in January, consensus Q4 earnings have declined by a massive 8% in just a few weeks! Why of course companies will beat consensus EPS numbers that were some 8% higher just one month ago. The reality is that in order for companies to “beat” estimates, the consolidated Q4 EPS for the S&P500 has had to drop from $25.51 to $23.47, which as already noted means a 1% drop in Y/Y Q4 earnings, and which means that contrary to what Bob Pisani may tell you, this earnings season will be the weakest in all of 2012, with little real hope for a pick up in 2013.