Is Earnings Growth on S&P 500 a Mirage?

March 21, 2019

S&P 500 earnings a Mirage?

Ed Butowsky, top wealth manager in Dallas and managing partner of Chapwood Investments, LLC, discusses the reality behind the earnings on the S&P 500 – is it a Mirage?

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Video Transcript:

Hi, it’s Ed Butowsky. So what drives the stock market is earnings growth, and remember stock prices move six to nine months ahead of earnings being released. So stocks have already discounted in the future what they think is going to occur. So if you look at a stock today, they already have priced in what people believe earnings are going to be down the road. But let’s look at earnings for a moment because this is troubling as something you need to know. Your PE on a stock should be close to or equal the growth rate of that stock. So if you have a PE on a company of 20 right, and that is your price divided by your earnings. So if you have a stock price of 20 and it’s growing or it’s earnings are at a dollar, that’s what it made. It has a PE of 20 now oftentimes they look towards the future as to what the earnings are going to be. But if you have a 20 that means the growth rate of that stock should be about 20% earnings growth. But here’s the problem. Earnings growth right now are being manipulated at a level that I’ve never seen before in roughly 30 years. Let me show you what I mean

Now. This is what’s happening in the big banks. 63% you can see right down here of JP Morgan’s earnings were from share repurchases. $1.1 trillion last year was spent by big companies buying back their own stock and then that stock going higher. That’s not earnings that you want. You don’t, you know, we’re happy to see it, but you want earnings from the growth of operations and expanding sales and so on. Another 22% on, I think the number is about 22% of earnings came from adjustments from how taxes are handled because of tax cuts. So overall, let me give you the big numbers here. 37% of earnings growth on the S&P 500 companies have come from stock buybacks and 22% have come from adjusting how taxes are assigned. About 50% right now of earnings are coming from, not operations, but from tax cuts and share repurchases. So what’s The real PE? If you take that out, 30 to 35 40 remember, you want to make sure that the growth of the earnings and the forecasted earnings growth on the S&P 500, about seven or 8%.

So that’s another reason to be very careful on this equity market. Hopefully that made some sense. Any questions? Call me. I’d love to get feedback from you. Thanks.