Jeff Seymour is a CFP, engineer, and investment adviser. His practice – Triangle Wealth Management – does financial planning and investment management on a fee-only fiduciary basis. His research focuses on global macroeconomic data. He may be reached via the website

RALEIGH, N.C. — The talking heads in the financial press are pounding the table, saying the stock market is trading at a price/earnings (P/E) of 10. So therefore, they add, this is a screaming “buy!” signal. To which I say: Which “E”?

They’re naturally referring to Fantasy E. Fantasy E is what you get when you:

  • guess at what next year’s earnings will be by using an assumption that revenue continues to grow, profit margins grow, and therefore earnings grow
  • ignore this year’s earnings and those of the past few years
  • ignore any bad stuff that happens

In other words, it is pure speculation based on nothing going wrong.

Here’s reality. Over the past 11 years, the S&P 500 has seen the following as-reported earnings. As-reported earnings are real earnings reported to the IRS. This is as opposed to what Wall Street prefers to use: Earnings from operations.

Earnings from operations allow CFOs to skillfully ignore bad stuff that happened.

Over the past five years, the S&P 500 averaged $59 in as-reported earnings, as seen in the accompanying table. (I’m rounding up to be charitable.) Think the economy for the next year is going to be appreciably better than the past five years were? (If you said “yes,” you clearly are drinking the Kool-aid that Wall Street is pouring.)

It’s a safe bet that next year is going to deliver, at best, $59 of as-reported earnings. Let’s make the math easy and call it $60. The S&P 500 index is slightly over 1,200 as I write this. That makes for a P/E of slightly over 20. That’s not a screaming “buy.” It is 25 percent higher than the long-term Shiller P/E average of 16.

It is also twice the P/E you hear from the talking heads in the financial press.

The only way you can claim stocks are cheap right now is if you are delusional, not very bright, in the business of selling equity funds, or a combination thereof.

Which E you use in calculating P/E depends on whether you use empirical data or fantasy data. Apparently, it also depends on whether you are in the business of selling mutual funds that are solely based on holding stocks no matter what.

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