We’re told that corporate earnings have been strong for the past several years. The trend has continued with the most recent earnings season- profits are up about 8%. The continued uptrend in profits has occurred in spite of the fact that revenue (top line sales) have been floundering. Earnings growth has been attributed to cost cutting, depressed wages, and low borrowing costs.
BUT…are earnings really growing? Rather than looking at earnings in nominal terms, or even inflation adjusted REAL values, consider evaluating S&P500 earnings in ounces of silver rather than in dollars. (see chart)
Earnings displayed in ounces of silver tell a fascinating story. Yes, corporate earnings have improved since the depths of the recession in 2009; yet they appear flat from 2010-2012 only rising significantly in 2013 (following QE3).
Also interesting is that during the depths of the 2009 recession earnings found support at near the same 1983 level as when the economy was transitioning out of the malaise and stagflation of the 1970s.
Also of note- the flat earnings period following the most recent recession had a silver ounce value near the low of earnings during the 1950s (about 2.8 ounces). The decade of the 1950s saw earnings in a range of approximately 2.8 to just below 4 ounces of silver.
The ceiling on corporate earnings stayed at 4 ounces until the end of the 1980s. Earnings were then energized to historic highs, propelled by deregulation, lower tax rates, the end of the Cold War, and the commercialization of the internet. Earnings peaked with the dotcom bubble at a value of over 10 ounces of silver.
What I find intriguing is that earnings have once again broken through resistance at 4 ounces. But what secular tail winds will propel earnings further? Certainly there are reasons to be optimistic…well, at least there is promise of abundant natural gas reserves.
As in the 1980s, the world economy is in a period of transformation. I’ll be watching corporate earnings in terms of silver. A spike above or below 4 ounces could indicate latent inflation/deflation and thus significant consequences to the direction of the stock market.