Long-term trend in real earnings

Discussion in the financial blogosphere is persistently taking place over where the market is headed. Recently I read someone pondering if we were at a level similar to 1992; a little more than a year into what would end up being a 10 year bull market that saw the S&P 500 run from the 320 level to the 1520 level in May of 2000.

Strictly looking at price of today’s market vs 1992 they are similar. Using Shiller’s P/E 10 the S&P is priced at 19.6 today vs 19.8 Jan 1992.

The difference lies in the earnings. In 1992 real earnings were below the long-term trend of an approximate 2% real growth rate in earnings. From 1992 to the market peak in the spring of 2000 real earnings grew at an annual rate of 11.24%. That is nearly 8 years of real earnings growth at 11+%. From 1995 through the midpoint of 2008 earnings were well above trend save for the recession of 2002. It appears with the massive reduction in earnings in 2008 and 2009 and the subsequent recovery we are now back in line with the long-term trend.

Simple statistics tells us that we are less likely to experience above average growth when starting at the trend then when starting below trend. Think mean reversion.

Unless we are willing to assume a continuation of the debt driven, record profit levels of last decade a reenactment of the bull market started in 1992 does not appear likely.