When you ask Wall Street about valuations (NYSEARCA:IWD) they are quick to respond that things are “within normal ranges”.
A spokesman from UBS sums up the sentiment quite well, “the much broader view of history strongly suggests that at some point in the current bull market cycle valuations will indeed exceed 17x or more.”
I have news for UBS, we are well beyond that point already.
Earnings are at 19.4x
Check out the summary below provided by Standard and Poor’s which shows the actual (otherwise known as “real”) trailing earnings and multiples of the S&P 500 over the past four years.
Not only is the Generally Accepted Accounting standard for earnings showing valuations (NYSEARCA:IVE) has blown by the 17x UBS is watching out for, valuations now sit near a historical extreme at 19.35x trailing earnings with 98% of companies reporting 3Q.
What’s even crazier is Wall Street is now projecting a 23% growth in earnings in 2015 in an effort to keep their story of low P/E ratios relevant. (They claim P/Es are only 15.22x because they take the liberty of looking “forward” toward made up estimates)
As I’ve outlined by the last column, if those numbers are hit, this will also be the most growth ever since the recession in 2008.
After two failed years of selling skyrocketing earnings to justify more “normal” P/E ratios to clients, maybe the third time will indeed be the charm and earnings really will grow 23% in 2015?
We doubt it and chalk this up as just another game Wall Street is playing so they can sell the public historically expensive stocks (NYSEARCA:IJS).
As our subscribers know, we have been following the misleading Wall Street earnings games for awhile now. One of my prior research pieces on the subject, “Ready for the Upcoming Decline in S&P Earnings Estimates” explains how Wall Street tricks the public with its earnings (SPX:^GSPC) estimates. Let’s just say this is not a new phenomenon.
In a perfect example and time-stamped in that article, 2014’s “gamed” earnings (operating) were once projected to be as high as $125 per share. Lo and behold, as we expected those estimates have been taken down, now at just $117 and skyrocketing the market’s actual P/E ratio higher as Wall Street now moves on to 2015’s made up numbers.
Our recent Newsletter and Technical Forecast also explained how the majority of the markets’ price gains have been driven by speculation (multiple expansion) rather than earnings (fundamentals) as price rises have not been backed by earnings growth going on three years now.
Don’t believe the hype. At $106 of trailing earnings for the S&P 500 companies (NYSEARCA:SPY), the market’s real GAAP based P/E ratio is over 19x. Buyer beware.
The ETF Profit Strategy Newsletter filters through Wall Street’s tricks to keep you abreast of what is really going on in the markets. The market today is at one of its highest valuations ever. So far stocks have ignored this as speculation runs rampant, but how much longer can the market keep ignoring the lack of earnings growth?