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November 7, 2019 | Stock Prices Overshoot Profits by Most Since 2000–Mind the Gap

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

As explained well by Lance Roberts in Corporate Profits Are Worse Than You Think,  the S&P 500 stock index price (in blue) has now overshot corporate profits (orange) by the most since the late 1920s and the 2000 bubble top.

In typical late-cycle fashion, consumer confidence is high while corporate leaders are worried about falling revenues and focused on cost-cutting.  As shown below, the sentiment spread between CEO and consumer expectations is the widest today since the tech wreck top in 2000.

Part of the issue here is that realistic corporate executives know they have had one hell of a liquidity-driven-run over the past several years, and extremely favourable financial conditions never continue forever.

They are also fully aware that corporate profits (orange line in the first chart above) have only remained inflated thus far thanks to record share buybacks and other accounting tricks they have used for near-term ‘beats’ at the expense of longer-term strength and returns.  More than anyone else, they know how the sausage has been made!! That’s why executives have been selling their own shares into the flow of corporate buybacks in record numbers.



As the Wall Street Journal reported, when surveyed, 93% of CFOs (head sausage makers) said that companies use reported earnings to overstate their financial performance in order to influence the stock price higher (as shown in the graphic on left).

Would-be investors who believe or argue that share prices are rising because they or their asset managers are savvy and picking ‘good companies’ with ‘solid earnings’ are deluded and missing the plot here.

This cycle will go down in history as one of the most capital destructive episodes of all time. And there were a ton of warning signs.

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November 7th, 2019

Posted In: Juggling Dynamite

One Comment

  • Dave Ktver says:

    All fine stuff with one major wrinkle…..there are absolutely NO indications of an impending market crash on the charts. It’s like 100 meteorologists and 50 environmental physicists telling me why it should be raining, but when I look outside i don’t see a cloud in the sky.

    If one knows their market history, this is a phenomenon seen many times before: analysts forecast doom and gloom immediately prior to the biggest upward moves. Sometimes it can be downright embarrassing, like Ray Dalio’s prediction of a major market crash just before the 1980’s bull market that lasted 18+years. The usual culprit is recency bias, as most analysts theorize that what goes up, must come down, which has been an accurate assessment of market movements for the last 19 years. And of course, many still have memories of 2008 weighing on their judgement.

    So when will the market head down? I would suggest in about 15 years, after the Millennials and Gen Z’s (53% of the population) have competed their demographic cycle of peak earnings and spending. In other words, if one is waiting for a massive decline to use their dry powder, it ain’t gonna happen.

    Bottom line: The markets are never wrong, but analysts almost always are. One should invest based on what IS happening, not on what SHOULD be happening. Markets are complex organic mechanisms and it takes a whole lot of hubris to think anyone can predict the future based on analysis rather than observation.

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