When Wall Street shills come on CNBC and spout BS about S&P 500 earnings going higher, justifying the current P/E ratios, remember this chart. Earnings always revert to the mean. Do you really think S&P 500 earnings are going to soar from this level as the world sinks into recession? The recovery in profits was based on trillions of dollars of debt based stimulus pumped into the veins of the zombie banks. Now it’s time to pay the piper.
With third-quarter earnings largely in the books (99% of S&P 500 companies have reported for Q3 2011), today’s chart provides some long-term perspective on the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today’s chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P 500 earnings have surged (up over 1100%) and currently come in at a level that is greater than what occurred at the peak of the dot-com bubble and very near what occurred at the peak of the credit bubble. It is interesting to note that the original run up in real earnings from Great Depression lows to credit bubble highs took over 78 years. The current spike has taken 29 months.