Everyone agrees earnings are booming. Here is the strongest case that they aren't.

This series takes a narrative that almost everyone accepts and assembles the strongest available evidence against it. Not for the sake of disagreement — because a consensus that has never been stress-tested is a fragile thing to own.

The consensus right now is that corporate earnings are extraordinary, and that this justifies equity prices. The supporting data is real.

The bull case, stated fairly

That is a genuinely strong set of numbers, and anyone dismissing it is not paying attention. Now here is the case against.

Objection 1: two companies are carrying a fifth of the growth

FactSet's own note points out that excluding Alphabet and Amazon — whose results included substantial investment gains — blended earnings growth for the quarter falls from 50.4% to 32.0%.

This matters beyond the index level. Investment gains are marked to market. They can reverse. An earnings base built partly on asset appreciation is more cyclical than an earnings base built on selling things to customers — and it is most flattering precisely when markets are highest.

Objection 2: a high beat rate is partly a measurement artefact

Eighty-six percent of companies beat expectations. It is worth asking what would have to be true for that to be evidence of exceptional performance.

• Analyst estimates are anchored to company guidance, which management issues and then works to exceed.
• Estimates are typically revised downward in the weeks before reporting season, lowering the bar being cleared.
• The long-run average beat rate is already 76%. A world in which three-quarters of companies routinely exceed expectations is not a world where 'expectations' means what the word implies.

Objection 3: the price already reflects it

The S&P 500's forward 12-month P/E was 20.0 in early August, against a five-year average of 19.9 and a ten-year average of 19.0.

The index is not at an extreme valuation. But it is above both averages while earnings growth is at a level that historically does not persist. Paying an above-average multiple for peak-rate growth is the specific combination that has historically produced disappointment — not because the earnings were fake, but because the growth rate normalised while the multiple did not.

Objection 4: the economy underneath is not producing this

Corporate earnings grew more than 30% on an adjusted basis in a quarter during which US payrolls fell 23,000, prior months were revised down by 103,000, retail sales fell 0.6%, and labour force participation dropped to 61.4%.

Where this argument is weakest

An honest bear case has to state its own vulnerabilities, so here are three:

• 32% growth is excellent. The adjustment removes the exaggeration, not the strength.
• A forward P/E of 20.0 against a ten-year average of 19.0 is a 5% premium. That is not a bubble by any reasonable definition of the word.
• Investment gains are real profits. Excluding them is analytically useful, but a company that owns appreciating assets genuinely is worth more than one that does not.