Click to enlarge



I have to admit: I have never seen this ratio before. Standard & Poor’s 500 Index to profits at all U.S. companies. Its a price to earnings ratio of the main US stock market against ALL US earnings.

According to this little used, odd ratio, Stocks are much cheaper after four years of gains than they were in the two previous bull markets. This look at corporate earnings is based on work by Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC.

In the above chart. we see a ratio  shows, the ratio of the Standard & Poor’s 500 Index to profits at all U.S. companies, as compiled quarterly by the Commerce Department and expressed in billions of dollars. For the first quarter, the reading was 1.02. Although the latest ratio was the highest since 2008, it was far from peaks of 1.43 in the third quarter of 2007 or 2.65 in the first quarter of 2000, as the chart shows. Both readings were posted near the end of multiyear gains in share prices.

Dutta said “The stock market’s performance has been well supported.”

I am not quite so sanguine.

The good news is 2013 Q1 operating earnings equaled $25.76 on a per-share basis, based on results reported as of last week. The bad news? Well, look at your screens the past few weeks . . .



David Wilson and Chris Nagi
Bloomberg, June, 4, 2013

Category: Earnings, Technical Analysis, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “S&P500 Index to Profits at all U.S. companies”

  1. plato363 says:

    Can I count my neighbor’s income as my mine?

  2. jus7tme says:

    Why should the SP500 index be ratioed against profits that include other companies NOT in SP500? Why is that meaningful?

  3. dctodd27 says:

    I think I have to chew on this one for a bit as I hadn’t seen this either. First reaction: were the late 1950′s – early 1960′s only marginally less of a bubble than the late 1990′s? That seems like a stretch….

  4. jnkowens says:

    Interesting reflection of PE. My concern is sustainability of earnings. To believe earnings can continue on this path, we have to believe that this time IS different. That there has been a paradigm shift which will allow corporate profits to continue at 11%+ of GDP, enriching shareholders and impoverishing the middle class (through stunted wages and diminished job prospects).
    If there were a way to add a few more data points to the same chart; namely work force participation, wealth inequality, and profits/GDP the resulting chart would not look nearly so optimistic.

    • bear_in_mind says:

      Regarding your point on sustainability of earnings, totally agree.

      There’s been a LOT of statistical and anecdotal evidence published over the last half-decade suggesting automation and wage repression have been key factors driving earnings (whilst revenues have been sluggish, at best). Fold-in yesterday’s revised Bureau of Labor Statistics Q1 “Productivity and Costs” report to the employment picture and one can reasonably posit that that corporations are boosting the bottom-line on the backs of their workers.

      The report indicates Real Hourly Compensation dropped -5.2 pct quarter-to-quarter and the key quote: “The decline in hourly compensation is the largest in the series, which begins in 1947.” (link below). If anyone had any doubt why the economy isn’t gaining momentum, there’s Exhibit A.

      So, if corporations continue to take this approach (and what’s going to stop them?), earnings will continue to inch upward. And need we mention all the tax shenanigans today’s corporations employ to further boost profits? These factors are very different when trying to compare measurements from past decades.

  5. constantnormal says:

    An interesting chart, but not quite apple-to-apples … aside from the glaringly obvious notion that the S&P 500 is NOT an index of ALL the companies in the US, there is also the problem that the index is (sorta) related to a per-share price, while the US Corporate profits are not, and thus the significant-but-unknown (at least to me) impact of all the stock buybacks on a US-corporate-profit-per-shr metric would be to raise the line above where it is on this chart. How much higher is the question.

    A more interesting chart would be the Wilshire 5000 index vs US corporate profits, especially if one could figure out a way to produce a corporate-profits-per-shr metric.

  6. NeilD says:

    Barry, thanks for highlighting. All I was trying to do was to deliver the same message in a somewhat different way. The message being my belief that the rally in stocks has generally been supported by stronger corporate earnings, perhaps not in the last quarter but certainly over most of the cycle thus far. I happen to think it has generally been corporate earnings not the Fed that has buoyed stock prices. Reasonable people will come to different conclusions. With respect to the suggestion of using the Wilshire 5000 index instead of the S&P 500, you get basically the same result. As an aside, I am an avid reader of your blog. Keep up the great work! Best, Neil

  7. (1) What about private corporate profits vs. publicly-traded corporations? What about the realtor’s office next door… do they really mean ALL U.S. companies? In addition to the earnings PER SHARE issue flagged by constantnormal, it’s certainly not true that the fraction of U.S. profits represented by the S&P500 has held constant for 70 years… how much has it varied?

    (2) Are the current profits sustainable? (Hell, are they even credible, given the changes in FASB accounting rules over the last 5 years?)

    (3) How much smoothing did they use on the S&P and on profits? The P/E for the S&P shoots up MUCH higher in 2008-2009 in most charts of this type…. given that the S&P500′s own earnings were nearly nil at one point.

    This chart smells fishy. One suspects that if they could’ve made the point with a cleaner, easier-to-understand comparison, they would have.

    Unfortunately, without data sources it’s hard to replicate the work, or to understand what choices were made in choosing the “price” of the S&P (for a whole quarter?) vs. the “profits”.

  8. MayorQuimby says:

    Stocks are a horrible buy at these levels imo – how much of those profits goes to investors? Last I checked the S&P yields less than the 10 year note. Why does everyone look to see what the next guy is going do instead of just buying value and sitting tight?

  9. I confirmed this plot using similar data available with FRED Graphs. It might look this way for reasons other than what the article wants you to believe…

    The authors (one is tempted to write “the market cheerleaders at Bloomberg”) failed to note that:

    (1) Corporate profits as a share of GDP are a factor of 2 higher than in the early 1980s (and higher than historical norms). If corporate profits mean-revert back to historical norms, and the ratio plotted by the authors stays the same, the S&P500 will drop by 50%!

    (2) Aggregate corporate profits being at all-time highs is not necessarily a bullish event. What happened the last few times they did that? (2000, 2007….)

    (3) “The stock market’s performance has been well supported,” Dutta said yesterday in an interview. “It’s perfectly sensible to pay up for profits.” …

    Well, “has been” is not the same as “will be”… it’s sensible to pay for future profits, not for past profits!

  10. pjmason says:

    If you remove financial companies from the U.S. Corporate Profits data and use the S&P 500 ex-financials, the story changes.

    • I’m interested in this approach. An analysis separating FIRE vs. Non-FIRE sectors of the markets would be extremely helpful to those of us who don’t want to “feed the squid”. Do you have any links or references to suggest?

  11. bear_in_mind says:

    Y’all have probably already seen these, but just in case…

    Margin Debt reflecting “Highway to the Danger Zone” at hand?
    By Chris Kimble
    May 24, 2012

    The American Consumer is Not Okay
    By Stephen Roach
    May 31, 2012–roach

    13-year cycle about to turn the market around again?
    By Chris Kimble
    June 6, 2013

    (P.S. I don’t know that I buy into the 13-year cycle meme — seems like cherry-picking data to meet your thesis (Reinhardt and Rogoff, anyone?). But the combo of high-margin, excess consumer indebtedness, and longer-term cycles…)

  12. lo574 says:

    I think the bigger question is whether after tax Corporate profits (can you say parabolic?) are sustainable. Small wonder we’re seeing even the tech sector issue dividends amidst record buybacks (to help boost EPS). This chart of historical profits speaks volumes if you ask me. The question is when does the bubble burst and we revert to the mean?

  13. Frilton Miedman says:

    Talking profits, earnings, market valuation or P/E without incorporating consumer buying power is like calibrating what distance a car will travel on a tank of fuel without knowing the size of the tank.

  14. Livermore Shimervore says:

    The stock market in bullish territory ( where we are now for those just tuning in) and fundamentals have nothing to do with each other. The market has an expectation of future demand that is driven by sentiment. Sentiments don’t always do their homework. If there is some similarity in the trend lines between performance and expectation it merely reflects what the market believes about the current economy is not far off but the question overbought stocks — how many S&P companies have seen no mild to moderate correction since the previous big drop– has almost nothing to do with the proper management of U.S. companies.

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