Three weeks ago, when looking at the incoming Q4 results, we were stunned by an unprecedented divergence: that of GAAP and non-GAAP earnings. We showed this difference as follows:
… and noted that while on a non-GAAP basis, the S&P’s trailing P/E is a relatively rich 16.5x (over 17x as of today), it was the GAAP P/E that was troubling, because at just 91.5 in actual S&P EPS, this implies that the GAAP P/E of the overall market is now a near-record 22x.
We showed the delta between GAAP and non-GAAP as follows:
At a dollar difference between the two “earnings” series of $26.5, this was the widest such spread since the financial crisis.
Unsure what to make of a spread that was so gaping, and a market that is so broken not to notice, we concluded as follows:
What can possibly short-circuit this positive feedback loop which leads to ever lower earnings, and increasingly lower prices? Two years ago we would have said another major central bank intervention or trillions in new Chinese loans. However, with both of these loopholes largely played out – China’s debt/GDP of 350% means that the entire nation is on the brink of a Minsky Moment collapse at any, well, moment, while recent central bank intervention have only led to even greater market volatility – this time around we don’t know what the true answer is. In fact, it just may be that this time around the market will actually have to crash, like it did in 2008 when the GAAP to non-GAAP spread was just as vast, for the great Wall Street “phony earnings” game to start from scratch.
What we forgot was the desperate actions by the ECB which may have kicked the can by a few more months, in the process sending the S&P 500 to an even more overvalued state.
But while for now the market is stubbornly refusing to crash, someone else noticed our analysis: Goldman Sachs’ chief strategist David Kostin who presents the following oddly familiar (granted we use column charts; Goldman uses line charts) of GAAP (or rather “operating”) vs non-GAAP earnings and the spread between them…
