THE FUTURE HAS NOT BEGUN YET:

The accounting standards now viewed by some as a pointless hindrance in determining stock values first began as an effort to reform corporate reporting following the 1929 stock market crash. Rules first published in the late 1930s evolved into the Generally Accepted Accounting Principles in use today. 

The problem is that the rules developed to track steelmakers' businesses don't always work in an economy where intellectual property reigns. 

  

If spending on intangibles such as research turned into assets whose costs were spread out over three to five years, current profits from S&P 500 companies could increase by 10%, according to an estimate by Alger, an investment management firm that uses R&D as a measure of innovations to pick stocks. If nothing else, the adjustment could help rationalize indicators like price-earnings ratios, valuation metrics that at first blush make the U.S. stock market seem overpriced.

"The market is doing the right thing" by looking past earnings in their conventional form, said Brad Neuman, director of market strategy at Alger. "One of the reasons why the P/E looks higher today is because there's much more intangible investment, which is weighing on earnings."

Last year, 46 companies in the S&P 500 posted net income that was smaller than their R&D outlays, an amount only eclipsed twice in the last decade, data compiled by Bloomberg show. While most were companies that saw organic earnings crushed by the recession, a larger number of firms posted a similar deficit in 2016 and 2018.

Changing the rule to reflect market practice would enhance profits -- in some cases, turning losers into bottom-line winners -- and perhaps better focus managers on the seemingly sensible goal of attending to growth in the future. 

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