” So far in fourth quarter reporting season, with 11 percent of the results reported for the S&P 500, three-quarters of companies have actually surprised Wall Street’s forecasters. Earnings are shaping up to be better than people expected.” CNBC

While it is a correct statement, it also shows the problem with the “earnings silly season.”

As I noted in this past weekend’s Real Investment Report:

With earnings season underway, there is support in the short-term for asset prices but remember that earnings are only beating sharply downgraded estimates. (This is the equivalent of companies scoring a 71 after the level for an “A” was reduced from 90 to 70)”

In other words, while the media is pounding the table screaming “buy, buy, buy,” investors should take a step back and remember that investing is ultimately a function of “actual” earnings, revenues, and cash flow. Or, as Warren Buffett once quipped:

“Price is what you pay. Value is what you get.”

To explain the issue, which ultimately becomes a major problem for investors, we have to jump into a DeLorean for a quick trip back to January 1, 2018.

At that point, Wall Street analysts were predicting earnings were going to rise to $156.75 per share by the end of 2019. With the S&P 500 trading at 2695.81 forward P/E’s were a “bargain” at just 17.19x earnings.

However, by May, analysts were chasing each other to be the highest estimate on Wall Street(bullish headlines get clicks) and pushed the 2019 number to a whopping 170.48 per share. With the market at 2734.62 at the end of May, it was time to “buy, buy, buy” as the market was “cheap, cheap, cheap” at just 16x earnings.