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Why stock-market bulls should be wary of rising tide of earnings shenanigans

Investors cheering stocks to all-time highs on another tide of strong earnings might be somewhat disturbed to discover the extent to which American corporations are emphasizing numbers that don’t follow accounting standards.

That’s a warning from Michael Arone, chief investment strategist at State Street Global Advisors, who noted in a paper this past week that the difference between earnings as reported under Generally Accepted Accounting Principles and nonstandard, or non-GAAP, earnings remains relatively wide compared with recent history (see chart below).

“It seems as though corporate executives are getting a bit more aggressive in their use of accounting and eliminating one-time events, and things like that, in a way to aggressively prop up their earnings,” Arone said, in a phone interview.

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