Lie to Me

<November 18, 2025>

In the 1990’s, one of the most admired and widely held stocks in America was General Electric (GE). It was the blue chip of blue chips—a pillar of corporate excellence. By 1998, GE had become the largest company in the U.S. by market capitalization. It was the NVIDIA of its day. But instead of designing sophisticated semiconductors, GE was an industrial conglomerate wrapped around a massive financial subsidiary.  

Many of GE’s businesses, from jet engines to medical imaging, had meaningful competitive advantages. However, what truly set GE apart was its remarkably smooth and predictable earnings. Quarter after quarter, the company reported profits that beat Wall Street estimates by exactly one cent. Around the office, we’d joke, “GE’s earnings are out. Anyone want to guess how much they beat this time?” The punchline was always the same—they beat by a penny!

Investors cashed in on GE’s impressive and consistent earnings growth, with its stock increasing 1,330% from 1990 to 2000.

Unfortunately, GE’s remarkable run couldn’t last. The stock stumbled during the 2001-2002 recession and suffered a far steeper decline in the 2008-2009 bear market. After years of aggressive expansion, GE Capital’s business collapsed under the weight of the global financial crisis. Loan losses mounted, funding costs surged, and the company lost its prized AAA credit rating. The illusion of stability was shattered as GE’s stock plunged 85% from its peak to trough.

While many investors suspected GE was smoothing its earnings through financial engineering, it didn’t stop them from investing and profiting handsomely. As long as the illusion delivered outsized returns, they were happy to play along with the earnings management game. 

During late-cycle economic and market booms, illusions are never in short supply. Investors rush into the latest fads, eager to keep up with the crowd. The rewards can be intoxicating. Even when the drivers seem too good to be true, few are willing to ask the hard questions about sustainability, legitimacy, or the consequences of being misled.

Today feels no different. With equity markets at record highs and valuations once again in bubble-like territory, we believe we’re in another period of investor denial. There are plenty of signs that something isn’t quite right, yet as long as stock prices keep rising, most investors would rather not know. 

There are many examples of attempts by businesses, governments, and other beneficiaries of asset inflation to keep the cycle going. For instance, companies continue to pursue the rewards of perpetual earnings growth, but unlike GE’s financial engineering, the popular method of this cycle is to use non-GAAP adjusted EBTIDA and earnings per share (EPS).

The number of adjustments and exclusions to reported earnings continues to grow, making it easier for companies to consistently beat earnings expectations. When management can exclude an almost endless array of expenses at their discretion, meeting or exceeding estimates has become routine. Investors have come to accept—and even participate in—the earnings expectations game, as long as their stocks respond favorably.

Balance sheets during boom periods are also rife with subjectivity and selective reporting. Consider the value of commercial real estate (CRE) loans on bank balance sheets, where the underlying collateral is often carried at inflated levels. In some cases, banks have taken meaningful charges after properties were sold, revealing that prior appraisals were not grounded in market reality. The practice of banks “extending and pretending” appears acceptable to shareholders who would rather see investment gains than accurate asset valuations and book value impairments.  

Companies aren’t the only ones maintaining illusions. The Federal Reserve has convinced investors it can sustain the current cycle indefinitely. Its fixation on financial stability has tied its credibility to soaring asset prices. Despite mounting evidence suggesting otherwise, it insists it isn’t backstopping markets, monetizing debt, or fueling wealth inequality and unaffordable housing. The reality tells a different story, as the Fed has overseen trillions of dollars in balance sheet expansion, years of negative real interest rates, and surging inflation across both asset and consumer prices. Meanwhile, it continues to assure us that its commitment to price stability remains intact, even as it cuts rates with inflation running above target and asset prices hitting new highs. Investors can choose to take the Fed at its word, or they can examine its actions and the real-world consequences.

And what’s a blog post about investors wanting to believe without mentioning private equity! Many institutional investors, such as pension plans, seem content not knowing the true value of their investments in private equity and credit. Not to mention how difficult these investments would be to liquidate and the haircut they’d need to take. When it comes to valuations and liquidity, silence is often the preferred strategy—investors in private equity and credit would rather not know.   

Finally, there is the investment boom in artificial intelligence (AI), where investors are currently reaping huge gains. Yet, serious questions remain about the returns on the hundreds of billions—or even trillions—being poured into AI infrastructure. Do investors truly want to know what they’re getting into, or are the risks of knowing and being left behind simply too great?  For many, it doesn’t matter—as long as their net worth continues to climb.

Whether it’s extrapolating unsustainable earnings growth, trusting the Fed will always come to the rescue, or refusing to mark asset prices to market, investors in late-cycle booms have a tendency to believe the unbelievable. In our view, we are in another such period, with participants eagerly riding the wave of easy money and seemingly unlimited gains. As past periods of excessive greed and extrapolation have proven, we believe this cycle will end. And when it does, fingers will be pointed, and the truth will be sought. Investors will look to pin the blame on Wall Street, policy makers, and politicians, conveniently forgetting how willing they were to participate and believe—as long as asset prices kept rising.    

Eric Cinnamond

eric@palmvalleycapital.com

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Definitions:

Non-GAAP earnings: Non-GAAP earnings represent what a company believes is a more accurate picture of its core operating performance, by removing items it considers non-recurring, unusual, or not reflective of ongoing operations.

Adjusted EBITDA: Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a non-GAAP financial metric used to evaluate a company’s operating performance by removing both non-operating and non-recurring items from net income.

Private equity: Private equity is a type of investing where firms raise money from investors to buy ownership stakes in private businesses—companies that aren’t traded on the stock market. These firms work to improve the businesses they buy, often by changing management, cutting costs, or helping them grow. After several years, they try to sell the companies at a profit.

Earnings per share (EPS): The amount of a company’s profit that belongs to each share of its stock. It’s calculated by taking the company’s total profit and dividing it by the number of shares that are currently outstanding.