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CHART OF THE DAY: Here's A Sign That Stock Market Investors Are Totally Nuts

Nov 5, 2013, 00:43 IST

Stock prices are going up as earnings growth expectations are going down.

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"During the month of October, analysts lowered earnings estimates for companies in the S&P 500 for the fourth quarter," said FactSet's John Butters. "The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 1.5% (to $28.46 from $28.90) during the month."

"At the same time, the value of the S&P 500 increased 4.5% (to 1756.54 from 1681.55) during October, and it closed at a record high on October 29 (1771.95)," added Butters.

There's arguably nothing more important to long-term stock market returns than earnings (or profit) growth.

"Profits are the mother's milk of stocks," says Larry Kudlow.

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This phenomenon of prices rising faster than earnings is referred to as multiples expansion. In other words, valuations are rising as reflected by an increasing price-earnings ratio.

However, price-earnings ratios are drifting farther and farther away from their long-term averages, causing some market watchers to warn that we are in a bubble.

Surely, stock market bears warning of a sell-off can't help but rip their hair out when they see charts like this.

FactSet

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