Economic Boom Is Running on Fumes

Don’t expect this fake economic boom in the stock market to last.

stock market bubble

If you’re invested in Wall Street I hope you made lots and lots of money this year. I also hope you’re booking some profits, because as this assessment states: The “booming” economy in the United States is mostly smoke and mirrors.

“Tyler Durden” posts at “Blackrock Stunner: S&P 500 Profits Are 86% Higher Than They Would Be Without Accounting Fudges.”

We have previously observed that while pundits are happy to focus on non-GAAP earnings which over the past several years have become a total farce, the reality is that GAAP EPS for the S&P in 2014 will be 1.3% lower than a year ago, and that as a result of crashing energy company profits, 2015 GAAP EPS will be lower still, meaning that contrary to the propaganda, the US will see two consecutive years of declining wage growth. That said, not even we expected to read the following shocker revealing just how naked the corporate profitability emperor truly is, and coming from the world’s largest asset manager on top of everything.

Presenting the stunning punchline from Blackrock’s 2015 Investment Outlook:

Corporate earnings are a key risk. Analysts predict double-digit growth in 2015, yet such high expectations will be tough to meet. Companies have picked the low-hanging fruit by slashing costs since the financial crisis. How do you generate 10% earnings-per-share growth when nominal GDP growth is just 4%?

It becomes tempting to take on too much leverage, use financial wizardry to reward shareholders or even stretch accounting principles. S&P 500 profits are 86% higher than they would be if accounting standards of the national accounts were used, Pelham Smithers Associates notes. And the gap between the two measures is widening, the research firm finds.

So assuming 126 non-GAAP, accounting-levitated 2015 S&P consensus EPS, this means the real EPS is… 67? Which in turn means that the real forward P/E as of this moment is over 30x!

Accounting gamesmanship has made profits appear 86% higher than they actually are, to goose those executive bonuses and stock-option plans. No wonder ‘insiders’ are selling like there’s no tomorrow—they know the truth.

As the old joke about hiring an accountant goes: Question to applicant: Given these figures, what would your report say about our financial condition? Answer: (As the candidate looks around, and closes the door.) What do you want it to say?