S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since, by Wolf Richter

If anyone doubted the assertion in SLL’s review of Robert Prechter’s book that earnings have no consistent relationship to stock prices, here’s further proof. From Wolf Richter at wolfstreet.com:

Grounded in some sort of new reality? LOL

The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!

These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.

Hype, financial engineering, and central banks hell-bent on inflating asset prices make a powerful fuel for stock prices.

And there has been plenty of all of it, including financial engineering. Share buybacks, often funded with borrowed money, have soared in recent years. But even that is now on the decline.

Share buybacks by the S&P 500 companies plunged 28% year-over-year to $115.6 billion in the three-month period from August through October, according to the Buyback Quarterly that FactSet just released. It was the second three-month period in a row of sharp year-over-year declines. And it was the smallest buyback total since Q1 2013.

Apple with $7.2 billion in buybacks in the quarter, GE with $4.3 billion, and Microsoft with $3.6 billion topped the list again. Still, despite the plunge in buybacks, 119 companies spent more on buybacks than they’d earned in the quarter. On a trailing 12-month basis, 66% of net income was blown on buybacks.

To continue reading: S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since