Research.LeutholdGroup

A recent theme in our valuation work is that we no longer need to assume a full-blown “reversion to the mean” to illustrate current U.S. stock market risks: Even a reversion to “old” bull market highs in ratios like S&P 500 Price/Sales, Price/Cash Flow, and Normalized P/E would result in bear-sized losses.

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We’ve said before that one of Wall Street’s great inventions is the “forward operating earnings” estimate for the S&P 500, because it results in a P/E ratio that invariably sounds reasonable (if not outright cheap). But this already-misleading EPS metric has become even more so in recent years because of the proliferation of non-GAAP “adjusted EPS” reporting practices.

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