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4 Shocking Truths About Earnings Season

The "litmus" test for companies' future growth is woefully flawed

by Nico Isaac
Updated: May 26, 2016

Wall Street just wrapped up its first of four 2016 earnings seasons, with all the major equity players from AA to ZOOM reporting their first quarter profits.

For mainstream finance, these numbers are the golden word, the litmus test for a company's future growth potential.

But according to a multi-page article in MarketWatch (pub: May 22), these numbers aren't what they seem. Goes the piece:

In theory, "earnings provide the best unbiased view of what's going on with companies, sectors, and the economy."

While in reality --

"Companies are using accounting schemes that are more specific to... how they want investors to perceive results.

"According to FactSet, more than 90% of S&P 500 companies use their own metrics in an attempt to make their numbers look better."

The end result being: The final reports are about as true-to-life as an air-brushed, photo-shopped celebrity image. Affirms the MarketWatch piece:

“It’s a holographic presentation bubble distorting underlying operational reality.”

In conclusion: Thanks to countless obfuscations, "adjustments" and strategic re-organization of facts, earnings data is skewed to err on the side of strong.

That, dear readers, is shocking truth number ONE about earnings.

We have three more, NOT covered in the MarketWatch article.

2. Strong quarterly earnings do not coincide with economic booms; nor do weak earnings equate with busts.

Here, our December 2009 Elliott Wave Financial Forecast provided the following chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998 to show a historic absence of any consistent correlation: 

"As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the March 2009 bottom in stocks. And not shown on the chart: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period."

3. Earnings are not consistent with stock valuations:

Here, our April 2011 Elliott Wave Theorist presented subscribers with this 80-year chart of the prices of $1 Worth of Annual Earnings from the S&P 500 and wrote: 

"The stock market never attaches to any benchmark of value. It is ceaselessly dynamic... In the past century, the major stock market averages have fluctuated 23-times around earnings... By the way, the only reason the P/E ratio is listed as fluctuating 'only' 23-times is that the graph used smoothes over data over four quarters.

"In fourth-quarter 2008, earnings were negative, so the P/E ratio was infinite. I submit that any measure that can fluctuate between six and infinity is not a benchmark at all."

4. Economists' earnings projections are a reflection of the past.

Here, that same April 2011 Elliott Wave Theorist provided this chart of actual earnings versus economic forecasts over the 22-year period of 1986 to 2008. 

"Forecasts for earnings lag actual earnings by a year, as do [economists'] forecasts for GDP, interest rates, employment and the stock market."

Think about it: Earnings is only one popular measure of market growth. Imagine the countless others you trust in, every day? Which of those is equally flawed, and how is that affecting the choices you make with your financial welfare?

We invite you to put the odds in your favor with an objective assessment of market trends with our flagship Financial Forecast Service. 
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