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Technical Notes for ‘Bubble or Not’

cyniconomics.com /  by ffwiley / January 11, 2014

This is an appendix for our earlier post, “Bubble or Not, U.S. Stocks Are Priced to Deliver Dismal Long-Term Returns.”

Defining earnings cycles

Using Robert Shiller’s S&P 500 earnings history, we first identify every earnings peak. These must meet two criteria:

  1. They have to be higher than any prior peak.
  2. They have to be higher than any subsequent earnings print in a period that includes an earnings contraction of at least 20%.

Although 12 peaks appear to meet these criteria, we exclude the first (in 1874) because we doubt it would hold up if we had earnings data prior to 1871 (other data suggests a strong possibility of a higher peak in the late 1860s). The 11 confirmed peaks are circled in the chart below:

long-term return article chart 4

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