Despite Financial Engineering & Clever Reporting Schemes, S&P 500 Earnings per Share Stuck for 3+ Years, but Stocks Soar

$1.7 trillion blown on making EPS look less bad.

The S&P 500 index, closing today at 2,373, hovers near its all-time high. Total market capitalization of the 500 companies in the index exceeds $20 trillion, or 106% of US GDP. In the three-plus years since the end of January 2014, the index has soared 33%.

And yet, over these three-plus years, even with financial engineering driven to the utmost state of perfection, including $1.7 trillion in share buybacks and despite “ex-bad-items” accounting schemes that are giving even the SEC goosebumps – despite all these efforts, the crucial and beautifully doctored “adjusted” earnings-per-share, perhaps the single most manipulated metric out there, has gone nowhere.

“Adjusted” earnings per share are back where they’d been at the end of January 2014. It’s a sad sign when not even financial engineering can conjure up the appearance of earnings growth.

Companies report earnings in two ways:

  1. All companies report as required under GAAP (our slightly inconvenient Generally Accepted Accounting Principles). These earnings are often a loss or way too small and shrinking, instead of growing, and hence not very palatable.
  2. So most companies also report pro-forma, ex-bad-items, “adjusted” earnings, based on the companies’ own notions of what matters. Analysts and the media hype that metric. This is just a method of reporting the same results in a more glamorous manner.

Then there’s financial engineering. Companies borrowed heavily over the past few years and used those funds to purchase their own shares. This hollowed out equity and left companies with piles of debt. Over the past three years, companies blew $1.7 trillion on share buybacks. This money was not invested in productive activities that would have expanded the company and the economy, and generated cash flow to service this debt. All it did was reduce the number of shares outstanding. This has the effect of increasing earnings per share (EPS) though the company didn’t actually make more money.

Add this system of share buybacks to the system of “adjusting” earnings per share via reporting schemes, and the result should be a miracle of soaring “adjusted” EPS. But no.

For the trailing 12-month period, “adjusted” earnings per share in aggregate for the S&P 500 companies was $109, as of March 16, according to global data provider FactSet, just a hair above where it had been on January 31, 2014:

But over the same period, the S&P 500 index has soared 33%. What gives?

I previously dissected the lack of growth in total adjusted earnings – not earnings per share, but total earnings for the S&P 500 companies. Since this is not a per-share metric, it excludes the effects of financial engineering, such as share buybacks. It showed that total earnings on a 12-month trailing basis in Q4 2016 were stuck at 2011 levels, though the S&P 500 index had soared 87%.

So financial engineering – share buybacks to reduce the number of shares outstanding – works, kind of: It made the results look less terrible. But even these expert financial engineering methods, at a cost of $1.7 trillion, couldn’t doll up results enough to show any kind of earnings growth over the past three years.

Yet stocks have soared despite these miserable growth fundamentals. So what gives in this no-earnings-growth environment?

Turns out the only thing that has soared is the price-earnings multiple. Over the three-plus years, it expanded by 47% from a P/E ratio of 18.15 on January 1, 2014, to P/E ratio of 26.64 today:

This combination of flat earnings and soaring stock prices, and thus expanding P/E ratios, is not uncommon. It comes in cycles: periods of multiple expansion are followed by periods of multiple compression. The current cycle of year-over-year multiple expansion has lasted for 57 months, the longest on record. The prior three record cycles – which ended in 1987, 2000, and 2009 – turned into periods of multiple compression associated with blistering crashes. Read…  This is Worse than Before the Last Three Crashes

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  30 comments for “Despite Financial Engineering & Clever Reporting Schemes, S&P 500 Earnings per Share Stuck for 3+ Years, but Stocks Soar

  1. mean chicken says:

    I’m having some difficulty comprehending how earnings are flat, considering corporate America has been hiring (reached full employment and need to import workers), does inflation tend to subtract or add to corporate balance sheets?

    • Wolf Richter says:

      Remember the S&P 500 companies are global in reach. About half (off the top of my head) of their revenues are derived from overseas. So the US economy alone is not the sole factor in their earnings.

      But they actually have not shown revenue growth either. That’s where ultimately the problem is. If they’d invested that $1.7 trillion in productive activities, such as R&D, etc. and if they hadn’t done all these mergers (which are a net negative), they might have shown more revenue growth.

      • DV says:

        Looks like domestically all energy products have also been a great contributor as revenues there fell in a big way, dragging down along a lot of support sectors with them.

    • TJ Martin says:

      If I may on the subject of ‘ skilled ‘ foreign workers … e.g. H1B visas … The companies are not hiring H1B’s because they cannot fill the positions . That is an Alt Fact lie straight out of the Corporate propaganda playbook intended to deceive

      What is happening is corporations .. especially those in the Tech and Pharma industries are REPLACING skilled experienced US workers many with 20 years of service or more with inexperienced H1B’s at less than half the salary paying zero benefits by taking advantage of and severely abusing a loophole in H1B visas with the Dept of Labor being completely complicit in the matter rather than enforcing the law as it pertains to H1B’s with the end result being many upper middle class jobs being lost to H1B abuses leaving thousands of US workers in unemployment lines

      Not to go all political .. but it is ironic that as this administration clamps down on illegal immigrants doing the menial low paying jobs Americans refuse to do .. they are completely ignoring the reality that high paying jobs are being lost to corporate H1B abuses left and right with the majority of the blame falling on those corporations and the rest on the congress that put that loophole in place and the Dept of Labor refusing to hold to the letter of the law in favor of the corporations

      But the genuine irony is .. those US workers being ‘ forced /coerced ‘ into training the H1B’s taking their jobs .

      • Harambe says:

        I wouldn’t say completely ignored. Next month expedited processing of H1b’s is getting shut down.

        Also, Chuck Grassley tweeted just yesterday or the day before that he wants to meet with Trump to discuss a shut down of H1b visas.

      • Petunia says:

        One of the reasons the H1B abuse has been on going for so long is that the stupid American workers take the severance on condition of staying quiet, when they should be protesting in the streets, right in front of the company. The way the abuse by Disney was discovered was one guy didn’t take the money, refused to train his replacement, and went to the press. If they had all done that, maybe they would still have their jobs. Don’t take the money, don’t stay silent, let them get the exposure they deserve. And definitely don’t spend any money at Disney.

    • beadblonde says:

      Full employment except for the missing and the opiate addled. Still some room on the credit card to get another beer & pizza but the pizza place is struggling to hire my service.

      Behold the credit “miracle” as the Fed continues to shove new money into the deflation sinkhole. But, hey, it will work until it doesn’t.

  2. akiddy111 says:


    when one considers the growth in the level of US Non Financial Corporate Debt over the last number of years, it really starts to get interesting.

    $1.699 trillion in 1994
    $5.825 trillion in 2016

    22 year CAGR = 5.75%

  3. economicminor says:

    I would love to see the above charts extended out so I could really get a historical perspective.

    Where is the current cash flow coming from? Is Buy Back mania still in force? Money from overseas? Where? The FED isn’t putting more on their balance sheet in secret are they? Is all this money from the government spending the cash they had hoarded before Trump won and then decided to dump to force a quicker debt ceiling conundrum?

    Money is created by creating debt.. so either the current rally is from new additional debt or? Who? Where? How? And how much more can be created.. Debts do have to have both some asset to secure them and income to repay them or are we just in Never Never Land where nothing is real and nothing matters?

    • d says:

      “Money is created by creating debt.. so either the current rally is from new additional debt or? Who? Where? How? And how much more can be created.. Debts do have to have both some asset to secure them and income to repay them or are we just in Never Never Land where nothing is real and nothing matters?”


      and some Rat Euro Trash.

  4. OutLookingIn says:

    The markets are experiencing extreme irrational exuberance.
    The players have become complacent and are lulled into the highs.
    Only one big problem, complacency only comes to light in retrospect. It must be broken before it can be recognized.
    By then it has become too late. Many will be caught.

  5. Flying Monkey says:

    … stock prices have reached what looks like a permanently high plateau.

    The Ghost of Irving Fisher 2017

  6. Tom Kauser says:

    Peace dividend!

  7. Kent says:

    Where has total margin debt gone over that period of time?

    • MC says:

      The NYSE released the last margin debt figures on 3/1/2017.

      Margin debt (inflation adjusted) for the S&P500 was just a smidge off the all time high of April 2015, at US$510 billion.
      In the time frame between January 2012 and January 2017 inflation adjusted margin debt for the S&P500 has gone from US$280 billion to US$500 billion, or a 78.57% increase.

      It’s worth noting the complexive NYSE margin debt is at an all-time high US$2,200 billion, again inflation adjusted. This beats the previous records set February 2015 and October 2000, both at US$2,050 billion.

  8. RD Blakeslee says:

    I feel like a little marmot under a rock watching a condor circle overhead wishing me dead so he could eat me, but it ain’t workin’ out for him ….

    • Dan says:

      Not to worry; I had the same feeling in 2001; but eventually condor did come down and chopped my head. So, this time, I will sit it out, and watch the condor chop other so called investors’s heads.

      • Petunia says:

        Apple just announced its latest innovation, a red iphone. This is what passes for innovation in tech now. I’m sure it’s bound to fly off the shelves, well…. maybe not so sure.

        • Smingles says:

          To be fair, Petunia, that’s a ridiculous example.

          They just released the iphone 7 last fall. The red iphone 7 is a marketing campaign, not innovation, and not marketed as such.

        • Kent says:

          Pshaw! Google glasses, 3D printing, autonomous cars, Uber, the iWatch. Tech is happening! Just imagine having your autonomous Uber car drive you around, that you summoned on your iWatch, while watching cool adverts on your Google Glasses and 3D printing a cheeseburger!

          It’s what we all dream about. /sarc

        • Dan says:

          There will be millions that if they read your comment will be saying “Oh, my god. I better run to the Apple store right away. Run, Run …”

          I just wish I had one percentage point of the talent that these people have in marketing; but then again, I’ve never been a successful sleaze. Marketing does amazing thing to the Muppets as someone on Wolf Street calls them.

        • R2D2 says:

          Kent: 3D printing and Google Glass, yes, they are innovation.

          As for Autonomous cars, they are not Uber’s. Many are working on them, and the spoils will be divided.

          As for iWatch, unless it is like Captain Kirk’s watch and allows me to talk to the Starfleet headquarters, it is not of much of a use. Even cell phones have very little space to work on, let alone some tiny watch. What am I supposed to do on a tiny watch? Grow tiny fingers so that I can push buttons on it?

        • Petunia says:


          The article is about earnings or the lack thereof, therefore, Apples’ new addition to its product line qualifies as a potential revenue generator.

          Maybe, a red iphone is exactly what the world needs right now. My smartphone cost $14, so I’m not the target customer.

  9. d says:


    Pre the Qe environment.

    Every-time records like that have been set, the same thing has happened.

  10. mvojy says:

    At least the EPS beats the 0.82% you can earn by putting $100,000 into a money market account

  11. MikeRW says:

    Another way to consider this is from the perspective of a Dupont model and a Dividend Discount Model and what drives them.

    If you are arguing the market is, or has been cheap, then you believe some combination of the equity risk premium will fall materially, operating profitability will increase materially, financial leverage will increase materially, and/or top line growth will accelerate.

    If after over 30 years of cost cutting there is still material amounts of fat left in large corporate America (that is what the S&P is) I would be surprised.

    Above shows that the financial leverage game ended already.

    Any acceleration in economic growth will be stomped dead by the Fed.

    I would never bet on the equity risk premium.

    My conclusion, the market is driven by flows and vapors and is very expensive.

    • Sporkfed says:

      The fat is in upper management . Upper management and certain investors have
      become parasitic. Their goal is not to
      have a profitable organization but to bleed
      it dry and discard the husk and associated
      costs onto the public/taxpayers.

  12. akiddy111 says:

    Corporate debt increased over $1 trillion in these three years, making the flat earnings even less impressive.

    However, I am guessing the strength of the dollar may have dragged earnings down because almost half of S&P 500 profits are generated overseas.

  13. beadblonde says:

    As the immortal Chuck Prince once said, “you have to dance while the music is playing.”

  14. Tom Kauser says:

    Dovish rate hike – bank speak for more and harder!

Comments are closed.