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US President Donald Trump boards the Air Force One to Brussels at the end of a 2-day visit to Italy including a meeting with Pope Francis at the Vatican at Rome's Fiumicino international airport, Wednesday, May 24.

Angelo Carconi/The Associated Press

Last week's Trump market slump seemed to signal that investor sentiment had taken a turn. It now appears it was no more than a speed bump.

The Dow Jones Industrial Average plunged 372 points last Wednesday, the biggest drop in more than eight months, or nearly 1.8 per cent, on fears that President Donald Trump's firing of FBI Director James Comey might put him in legal jeopardy. Some strategists invoked Watergate. But a week later, investors have largely filled in the hole.

The Dow is up almost 350 points since last Wednesday's low, recovering nearly 90 per cent of what was lost and putting the market again within 1 per cent of its record high. The VIX, which spiked last week, is back below 11, and near its decade low. One market strategist told Business Insider that Mr. Trump could get "beamed into space" and the market would do just fine. Complacency has been restored.

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The reason the market shrugged off Mr. Trump's troubles appears to be earnings, which have appeared hearty recently. First-quarter earnings of the companies in the S&P 500 rose nearly 14 per cent compared with those a year ago, according to earnings tracker FactSet, which was the biggest jump since the third quarter of 2011.

What's more, Wall Street strategists and investors think the current earnings gains can continue despite an overall slow-growth economy. Expectations are that earnings of the S&P 500 companies will increase 10 per cent this year and 12 per cent in 2018. All that seems to make the S&P 500's elevated forward price-to-earnings ratio of 18.5 justified, and not perhaps just floating on Trump deregulation or tax-cutting hot air.

But those earnings may not be as good as they appear. The first problem is measurement.

Recently, more and more companies have been reporting adjusted earnings, or those that don't comply with generally accepted accounting principles. And those adjusted earnings might be making the first-quarter's profit jump look better than it is.

A year ago, the Securities and Exchange Commission said it was going to crack down on the use of non-GAAP earnings, but that crackdown either didn't come or has been more of a tap. Of the 30 companies in the Dow, 19 reported non-GAAP earnings in the first quarter, down from 20 a year ago, according to FactSet. Unsurprisingly, those corporate-preferred non-GAAP earnings were nearly 54 per cent better than the unadjusted ones. FactSet and other earnings trackers blend non-GAAP numbers with GAAP numbers when reporting the earnings growth of the S&P 500, so the account maneuvers matter.

Second, a good portion of the zoom in earnings has come from a single sector: energy. Earnings in that sector alone, which was hit a year ago because of a plunge in oil prices, rose nearly 800 percent in the first quarter, according to Bank of America Merrill Lynch. Exclude energy, and the S&P 500's earnings growth in the first quarter drops to 9.4 per cent. Bank earnings, too, jumped 20 per cent. Take out the financials, the second-best performing sector, and the overall earnings of the S&P 500 rose just 7 per cent in the first quarter, according to Bank of America. Of course, 7 per cent is still a lot better than the nearly nonexistent growth of the past few years.

But the question is how excited investors should be about even that growth.

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Take into account the fact that earnings have been flat for the past few years, and this year's jump doesn't look so good. Even if bottom lines do jump nearly double digits this year, the average annual earnings increase of the S&P 500 for the past five years will still be only 4 percent. Next year, that number, again if earnings estimates are correct, could jump to 6 per cent. That's still a far way away from the 18.5 times next years earnings, or even the 16.5 times 2018 earnings, that stocks are trading at. All that suggests that the current resurgence in earnings alone may not be enough to justify stock levels. Without a bit of Mr. Trump's deregulation or tax-cutting magic, keeping the market aloft may be tough after all.

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Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

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