Even Accounting Gimmicks Can No Longer Save Earnings Growth

s&p ratio

I have long argued that most of the corporate earnings growth over the last five years came as a result of 3 primary drivers….

Zero interest rates.
QE.
Share buybacks.

Making today’s stock market one of the most expensive ever. In net historical terms. Unbeknownst to me, I left another driver out. BlackRock brings it home. BLACKROCK: Accounting Trickery Has Boosted S&P 500 Profits By 86%

It becomes tempting to take on too much leverage, use financial wizardry to reward shareholders or even stretch accounting principles. S&P 500 profits are 86% higher than they would be if accounting standards of the national accounts were used, Pelham Smithers Associates notes. And the gap between the two measures is widening, the research firm finds.

In other words, it is not enough to borrow money at zero interest rates to institute share buybacks in order to drive earnings higher. By the way, the overall US economy now operates on the same principal. Companies must now stretch their accounting principals in order to show some sort of a earnings growth. Propelling today’s overall valuation and stock market levels from “crazy” to “it doesn’t matter anymore”.