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The S&P Index at 2900: The Biggest Wall Street/Fed Whopper Ever Told, Part 3

• By David Stockman David Stockman**Q**s Contra Co

We have been cogitating on the gross anomaly of our time: Namely, the fact that pre-tax corporate profits of $2.2 trillion (annual rate) posted for Q4 2018 were actually a tad lower than they were 7 years ago in Q1 2012, yet the S&P 500 has gained 125% during the interim.

To hear the talking heads of Wall Street tell it, of course, there is no anomaly at all because, why, corporate profits have been "gangbusters". For instance, so called "operating" profits are forecasted to rise by 23% between the end of 2018 and 2020, implying hitting the buy key is a no brainer.

But the above numbers are just another iteration of Wall Street's ex-items forward hockey stick, which is absolutely useless because it way overstates true GAAP profits; and it goes through a ritualized shrinking process so consistent that you could set your watch buy it.

As shown below, during 2014-2017 the initial two-year forward estimates ended up shrinking by 10-40% by the time actual 10-Ks were filled with the SEC; and that's even after Wall Street analysts had combed through the filings to strip out all the ex-items bad stuff (i.e. asset write-offs, goodwill write-downs, facility closings, restructuring charges for severance, stock option expense, pension charges etc.) so as to powder the filed pig to the maximum extent plausible, or not.

In the case of 2017, which wasn't completed when this chart was made, the actual ex-items number for the year was $124.51 per share, meaning that it shrunk by about 10% from the original estimates.

Likewise, in March 2018, the forward estimate for December 2019 was $172.62 per share, which number has already shrunk to $164.99, and there is still nine more months of shrinkage yet to go.

The truth is, the market is always priced nearly the same in forward PE terms, which is the only valuation metric Wall Street recognizes. That's because the earnings hockey sticks produced by so-called equity analysts and Wall Street strategist are everywhere and always 15-30% higher two years out compared to the present; and because in the entire history of Wall Street earnings forecasting, a recession has never, ever happened!

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