There are perhaps two ways to determine if the index-level operating earnings numbers have begun to pull ahead of actual earnings, fairly conceived.
The first is through a forensic accounting approach, applied either to all the firms in the index or – more plausibly – a select group of firms whose accounts seem particularly suspicious.
A second approach, which I pursue here, is simply to compare the operating earnings figures with alternative publishedmeasures of underlying earnings, such as the GDP-based measure or reported earnings.
This will not pick up accounting fraud per se, but it does go to earnings quality, and the approach has generated signals that have correlated with fraud in the past. I would guess it addresses perhaps 1/3 to ½ the question at hand.
In this very short note, I show some evidence that the operating earnings figures have edged towards “generosity” in a typical late-cycle fashion. But there does not appear to be a major story here, and the issues that are present are already roughly controlled for in my own valuation framework, which I will update soon.
Spoiler: there has been no significant change.