Troubling Tuesday – Is The Stock Market Overvalued?

“In a word, I was too cowardly to do what I knew to be right, as I had been too cowardly to avoid doing what I knew to be wrong.”– Dickens, Great Expectations

Great expectations.

That sums up the mood of the market very nicely.  In this very interesting chart (thanks Scott Miller), you can see how the earnings expectations for the S&P 500 are generally fantastic at the start of each year, only to lead to crushing disappointment by the end of the year. 2017 earnings expectations are already down 15% from where they started and 2016 actual earnings are coming in 20% below early estimates.  

In fact (I know, what are facts?), ACTUAL earnings for 2016 are only 8% higher than 2013s earnings were yet the S&P itself has risen from 1,500 in Jan 2013 (when expectations were higher than the actual 2016 earnings) to 2,268 at yesterday's close. That's up 51.2% on 8% more earnings – boy are we suckers! And keep in mind these are OPERATING EARNINGS – not including interest payments and taxes or, as investors like to call them – real profits! 

Any way you slice it, we're paying at least 20% too much for equities based on their actual performance. 20% off 2,268 is 1,814 and our fair value estimate for the S&P on our Big Chart is 1,850 and if earnings do rise 8%, as expected, then we'll be happy to raise our bar 10% to 2,035 so let's say that's the fair forward value of the S&P.

As you can see from this Haver Analytics chart, since 2013, S&P companies have taken on a tremendous amount of debt, much of it used for stock buybacks, which reduces the number of shares the earnings are divided by to make earnings look like they are improving – even when they are actually not. In fact, the real earnings of the S&P 500 are DOWN 9.01% from 2013.

You will not hear this from the usual MSM cheerleaders, even though the numbers are right there – they don't want to let facts get in the way of a good story and nobody likes to hear negative news and, more importantly, viewers don't tune in to hear it. They want to hear that their investments will all double and they are going to become rich very soon and, if you can't tell them how to make that happen – they will find someone who will (tell them, that is – it won't actually happen).  

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Disclosure: Our teaching theme at Phil's Stock World is "Be the House, NOT the Gambler."  Please see " more

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