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Prices for U.S. large cap stocks stand at an all-time high, but so famously do earnings. So if you believe the Wall Street’s bulls, equities remain a good deal because you’re still getting plenty of cookies in the box. Warning to investors: A box this expensive has seldom contained so few Oreos.

Let me explain. What would you think if the number of Oreo cookies in a family-sized box kept shrinking, making the price per tasty treat richer and richer? Let’s imagine that just five years ago, moms and dads were bringing home a 144 cookie value pack for the same price Nabisco now gets for its standard offering of 120 Oreos. Would America think that’s a great deal, or that paying 20% more per cookie is just too rich?

The Oreo fable illustrates what’s happened in the stock market. Think of each $10,000 or $100,000 that investors pay for a broad swath of S&P shares as the box, and the earnings garnered from each purchase––the profits per dollar paid––as the number of cookies in the box. Over the past few years, the S&P index has risen far faster than profits, shrinking the count of Oreos in the value pack, so that investors have gone from paying moderate to super-gourmet prices for each cookie.

The problem: Investors typically get dismal returns after buying when the fewest Oreos are rattling around, and the best returns by purchasing when the box is packed.

Earnings are at record highs

First, let’s look at the Oreos by focusing on the trend in earnings. It’s instructive to trace the trajectory profits from one record peak to the next. In Q2 of 2007, the S&P 500 profits hit a then all-time high of $84.92, based on four quarters of trailing earnings-per-share, then collapsed in the financial crisis before rebounding to another summit of $105.96 in September 2014.

Almost five years later in Q2 of this year, the S&P planted a new flag at $135.27, and the estimated number for Q3 is just a whisker lower at $133.95. (I’ll use that number going forward since it’s the most current, and is extremely close to the 6/19 record.)

The point is that profits have risen rapidly from peak to peak––especially in reaching the last pinnacle––and now stand at ultra-high levels by every economic metric. From Q3 of 2014 to Q3 of 2019, the S&P EPS rose 2.7% a year adjusted for inflation. While that doesn’t sound like a big number, profit growth far outpaced the overall economy, beating the 2.2% annual gains in GDP by a 19% margin.

S&P operating profits this year have averaged 11.3%, their best performance in a decade, and 1.8% points higher than the average of around 9.5% since 2010. Overall, corporate profits now account for 9.8% of GDP, far above the long-term norm of roughly 7.5%. So profits aren’t just at a routine cyclical peak. They’re at an apex that’s exceptionally high compared to all the other peaks.

Prices have risen much faster than profits

Considering today’s exceptionally high earnings, you might think that investors are getting plenty of cookies in the box. Not so. While the profit trajectory’s been steep, the trend in prices has been steeper. Since the peak in mid-2007, S&P 500 earnings-per-share have risen by 59%, but the S&P 500 index jumped by 106%, based on its November 11 close of 3093. The pattern repeated in the five-plus years since profits crested in Q3 2014: Earnings rose 28% and the S&P waxed by 57%.

In both the five and twelve year periods, stock prices rose twice as fast as earnings.

The result is fewer cookies in the box

At the 2007 profit summit, investors were getting $5.60 in earnings for every $100 they spent on an index of S&P stocks; the price-to-earnings multiple stood at 17.8, meaning the inverse, or earnings for each dollar paid, was 5.6%.

By the next mountaintop in 2014, the S&P was paying $5.40 for every $100 invested (meaning the P/E was a slightly higher 18.6).

Today, the S&P’s price-to-earnings ratio stands at a lofty 23, so that it’s offering a paltry $4.30 on each $100 held in its stocks. That’s 23% less than at the 2007 earnings peak, and 20% below the number at the apex of five years ago.

Today’s investors are getting one-fourth to one-fifth fewer cookies in the box compared with folks who bought S&P stocks at the two previous peaks.

What does the paucity of Oreos suggest about the future?

The danger is that investors will suddenly decide they’re not getting enough cookies in the box and demand more. Of course, the bulls’ argument is that profits will rise rapidly from here, solving that problem. The analysts polled by S&P forecast the earnings-per-share will surge to $165.15 at the close of 2020, an increase of 24% that would bring the P/E, based on today’s prices, to 18.7. It’s the “forward multiple” in that range that you invariably hear from the bulls, not the much more reliable 23 based on what’s actually happened over the past four quarters.

What are the odds that a 2020 earnings explosion will bail out the markets? It’s important to emphasize again that profits are already at ultra-high levels measured by operating margins and share of national income, leaving not only little room to grow, but raising the risk of a steep decline. Were profits to grow by 24% by the end of 2020, their percentage of GDP would jump from 9.8% to nearly 12% of GDP, and margins would swell to from 11.3% to 13%. Both numbers are unheard of.

It won’t happen. The current profit bonanza arises from a confluence of extraordinary factors. Labor costs have been subdued for a decade, the drop in corporate tax rates produced a profit windfall, and super-low interest rates kept borrowing costs in check. But today, wages are rising briskly in a tight labor market, and in recent days, long-term rates have been ascending, not to mention that the tax boon provided a one-time benefit. Those shifts are pointing towards flat or even lower profits in the future.

Imagine if earnings simply rise with inflation, and investors demand the $5.30 for every $100 they pay for stocks, so that the P/E returns to its average since 1990 of around 19. To get there, shares would need to fall 17%. What if earnings drop by 10%, a common phenomenon that occurred after peaks in 2000, 2006, and 2014, and investors want their normal count of cookies? In that case, the S&P 500 would shed more than a quarter of its value.

The current state of few cookies in the package doesn’t mean that stocks have to tumble. It’s possible that we’re in a new normal, where folks are satisfied with a lot fewer crunch confections than they used to get at the same price. But if that’s true, accepting fewer Oreos in the box means investors will be saddled with low returns going forward. Wall Street’s argument that gains will be great from here can’t happen, at least for very long. Once again, the big money is made buying when the package is packed.