These strong results are not due to better oil prices. Sales for the sectors with the highest weighting in the S&P have grown an average of 9% in the past year. Moreover, margins outside of energy have expanded to 10.8%, a new high.
Bearish pundits continue to repeat claims that are more than 20 years old: that "operating earnings" are deviating more than usual from GAAP measurements, and that share reductions (buybacks) are behind most EPS growth. These are both wrong. Continued growth in employment, wages and consumption tell us that corporate financial results should be improving, as they have in fact done.
Where critics have a valid point is valuation: even excluding energy, the S&P is now more highly valued than anytime outside of the 1998-2000 dot com bubble. With economic growth of 4-5% (nominal) and margins already at new highs, it will likely take excessive bullishness among investors to propel S&P price appreciation at a significantly faster rate.
* * *
84% of the companies in the S&P 500 have released their 2Q17 financial reports. The headline numbers are good. Overall sales are 6% higher than a year ago, the second best growth rate in more than 5 years. Earnings (GAAP-basis) are 19% higher than a year ago. Profit margins are at new highs of 10.3%, exceeding the prior highs from 2014.
Before looking at the details of the current reports, it's worth addressing some common misconceptions regularly cited by bearish pundits.
First, are earnings reports meaningfully manipulated? This concern has been echoed by none other than the chief accountant of the SEC, who has complained about non-GAAP earnings numbers being "EBS", or "everything but bad stuff." Enlarge any image by clicking on it.