At what point does the profit bubble pop? Based on corporate guidance, perhaps it already has.

Amid trade tensions, the rising US dollar, and a clear slowdown in Asia and Europe CEO sentiment has gone sour. As a result, Companies Are Furiously Guiding Down Analyst Earnings Estimates.

At what point does the profit bubble pop? Ever since Caterpillar Inc. mentioned a “high water mark” in growth, Wall Street has been on alert.

To date, the worries have been unfounded. Earnings soared 24 percent in the first quarter and did it again in the second. And while nothing is likely to prevent another blowout quarter in the third, one trend bears watching: the rate at which executives are guiding down forecasts.

Led by high-profile warnings from Netflix Inc. and Applied Materials Inc., the number of S&P 500 companies saying profits will trail analyst estimates outnumbered those saying they’ll beat them by a ratio of 8-to-1 in the third quarter. That’s the most in Bloomberg data going back to 2010.

Bucking the Trend

In a game of “beat the street” analysts continually guided earnings estimates lower. Now despite caution from companies, they are suddenly guiding earnings estimates higher.

Why?

It’s the only way to justify absurd valuations.

The P/E ratio is 16.8 times forward guidance.

CAPE – Shiller PE

In contrast to the forward PE, the current Shiller PE Ratio is 33.49.

The only time the cyclically-adjusted PE was higher was during the dot-com bubble. But unlike now, there were plenty of companies with low PEs and excellent profits in 2000.

Energy companies were a standout example. Now, we are in a “damn near everything bubble”. Affectionately called the “everything bubble”.

Gold is now one of the few and far between non-bubble standouts. Some might even disagree with that.

Mean Reversion

Earnings are mean reverting. The problem is a matter of timing.