“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
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.