What Is The True Aggregate S&P 500 Earnings?

Before I get into the meat of this article, I will provide supporting evidence and clarification for points I made in a previous article. I described the recent political polarization which has occurred in consumer sentiment surveys. In the Gallup survey below, you can see how Republicans have become more likely to make a major purchase because their preferred candidate won the presidential election. I don’t think making personal consumption decisions based on an election is sustainable because for Republicans to spend more money their wages must increase to fund these purchases. Also, I don’t think Democrats will withhold spending money for four years if the economy improves. The prediction I’m making is regardless of the trend in these polls, the difference between Republican and Democrat optimism will shrink as the contentious election becomes a thing of the past.

Another point I made was that stocks are expensive according to most metrics. The chart gives a summary of various valuation metrics as of February 28th. Since then the S&P 500 is down less than 0.50% which means the metrics would be almost identical to the numbers below if they were updated. 15 out of 20 metrics are signaling the S&P 500 is overvalued. I would argue the valuation metric, which looks at the Russell 2000 vs the S&P 500’s forward PE, doesn’t mean the S&P 500 is undervalued because both have high PE’s. This is the flaw in looking at relative valuations. For example, every technology name is cheaper than Snap, but that doesn’t mean those names are good buys.

The final point I want to make as a clarification to that previous article is the difference in reported S&P 500 earnings results. S&P has a much lower earnings total than FactSet. This is an important point which I shouldn’t have glazed over. S&P has the 2016 aggregate earnings for the S&P 500 at $106.26 while FactSet has the 2016 aggregate earnings at $119.03. This wide difference is because S&P uses reported metrics, while FactSet uses operating earnings. Operating earnings exclude non-operating expenses like interest and taxes. This is why FactSet’s earnings totals are higher than S&P’s.

I think it’s important to look at both metrics because it’s not as if one metric will give you the absolute truth on where stocks are headed. As I have showed with charts that use valuations to project future long-term stock performance, the results aren’t perfectly correlated. There is wiggle room since there’s other factors at play regarding stock performance besides valuations. The difference between FactSet and S&P’s earnings metrics has increased lately for the same reason the difference between GAAP and non-GAAP earnings is heightened. We’re at the end of the cycle which is when math becomes fuzzier. When sales slow, firms and investment bankers try to do whatever it takes to keep the party going. The most obvious fudging of the numbers is when stock based compensation is not counted as a recurring expense even though it is the equivalent of salary.

Pending Home Sales

I often highlight the positive economic reports because I am objective in my analysis. A few positive reports won’t change my overall outlook, but if you stuff reports which disagree with you under the rug, you are going to hurt your performance. Tuesday’spositive report was the pending home sales. The pending home sales index for February was up 5.5% which is a 10-month high. The report was boosted by the unseasonably warm weather in February. March’s number may be hurt by the northeastern snowstorm which hit in the middle of the month.

The pending home sales report is impressive because of the increase in house prices and interest rates. Housing prices in January increased 5.7% on a year over year basis. The 30-year fixed rate is now at 4.23% which is down from its December peak of 4.32%, but up on a year over year basis. The declining interest rates since March 13th may be a tailwind for April’s pending sales report. That’s perfect timing to help improve the spring buying season. The 10-year bond yield is at about 2.39%. The key level I’m looking at is 2.30%. A move below that level in yields would end the range bound situation the 10-year has been in. This would be bullish for stock multiples as the only game in town scenario continues.

Labor Market Strength?

When news reporters discuss the strong home sales metrics, the reason associated with the strong report is the strong labor market. There’s no doubt the labor market improved from the depths of the recession. The ADP and BLS reports of jobs created have been strong and the jobless claims data is off the charts strong if you look at it the way it’s been traditionally been analyzed. With all those caveats out of the way, some metrics do not show the labor market is healthy. As you can see in the chart below, the BLS measure of total hours worked shows the growth has been much slower in the past two cycles than in the prior four cycles. The improvement in pending home sales may have more to do with the Federal Reserve’s QE and low interest rate policies than the strength of the labor market. Slow non-supervisor hourly earnings growth and slow growth in the BLS’s total hours worked index doesn’t paint a pretty picture of the earnings the average American worker is taking home.


The strength in consumer sentiment surveys is nothing more than Republicans showing their optimism because their candidate won the election. That doesn’t provide adequate evidence that the economy is strong. The pending home sales index improving 5.5% in February is a better supporting factor for the bullish argument that the economy is strong. However, valuations still make me question buying stocks even if I were to grant to point that the economy is healthy. The stock market is even more expensive that what FactSet reports because it doesn’t include taxes and interest payments in its earnings metrics. In the long run, those payments cut into the future dividends investors will be paid, so they must be included in valuation measurements.

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