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Real Time Insight

On October 9, 2007, the Dow Jones Industrial Average closed at 14,165. That would be the index's all-time high for more than 5 years. Then yesterday (March 5), the Dow finally closed above this level to reach a new all-time high. And the S&P 500 is knocking on the door of new highs as well. It's within 1.5% of its all-time closing level of 1,565.

But stock prices aren't the only things near all-time highs. So are corporate earnings.

Take a look at this chart of the "EPS" for the S&P 500 and its trailing P/E ratio:

While the S&P is roughly at the same level it was in October 2007, trailing EPS is about 9% higher:

Q4 2007: Trailing 4-quarter EPS on S&P: $89.31
Q1 2013: Trailing 4-quarter EPS on S&P: $96.99

That would put 2007's trailing P/E at 17.5, compared to 15.9 today. However, it's not trailing earnings that the market cares about. It's future earnings. And that's what has me a bit worried.

According to Standard & Poor's, analysts expect 2013 S&P earnings of $111.21 (representing 15% annual growth) and 2014 EPS of $125.15 (13% annual growth). But I think these estimates are way too high, particularly for 2014. For that kind of growth to occur, profit margins would have to expand even further from here. And you can clearly see in the chart above that earnings have started to decline slightly over the last couple of quarters. Perhaps this trend will reverse and earnings will jump more than 25% higher from here in just 2 years. But I doubt it.

Take a look at the chart below of the annual percentage change in S&P trailing 4-quarter earnings going back to 1989. You can see a huge deceleration in growth over the last few quarters. The big question is: will earnings growth reignite like analysts expect it to?

Zacks Releases Their 7 Best Stocks for August, 2014

These 7 were hand-picked from the list of 220 Zacks Rank #1 Strong Buys with earnings estimate revisions that are sweeping upward. Their stock prices are expected to rise sooner than the others.

Today, this Special Report is available to new Zacks.com visitors free of charge.

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