There’s comfort in averages. For decades, analysts have soothed their models by “normalizing” earnings per share (EPS)—sanding down the spikes and valleys, smoothing out the narrative, and producing a number that whispers: “This is what the company really earns.” But in a world shocked by pandemics, supply chain chaos, and monetary whiplash, the old normal may be a dangerous illusion—especially if you don’t know where to look.

Why Normalization Isn’t Always “Normal”

Normalization is a seductive tool. Remove one-off items, adjust for cycle extremes, and—voilà—reality seems tamer. But in a post-shock economy, what is “normal” anyway? The pandemic didn’t just knock earnings off course; it rewired demand, pricing power, and even business models themselves.

Across sectors, the danger is not distributed equally. For some, normalization is a helpful compass. For others, it’s a faulty GPS sending you straight into the woods. The most perilous sectoral traps? Let’s explore.

The Mirage in Manufacturing: When Cyclicals Lie

Industrial cyclicals—think autos, machinery, chemicals—are classic candidates for normalized EPS. Strip out the boom, ignore the bust, and price the stock on a “through-the-cycle” number. But what if the cycle has changed for good?

• Post-shock demand is not always pent-up: In autos, pandemic-era shortages and stimulus checks inflated margins. Is this the new baseline, or will normalization anchor you to a mirage?
• Structural cost inflation: Supply chain scars and deglobalization have lifted costs for good. Normalizing back to pre-shock margins might be wishful thinking.
• Secular shifts: Digitalization, electrification, and new regulation mean the old “cycle” is now a spiral—sometimes up, sometimes down, never the same twice.

Tech’s Shape-Shifting Profitability: The New Chameleons

In the technology sector, normalization is a moving target. For fast-growing software and platform companies, the pandemic was a windfall. But what happens when the sugar rush fades?

• Pandemic pull-forward: Many tech names reported record EPS as remote work and e-commerce surged. Normalizing off 2020–2022 figures risks overestimating sustainable earnings.
• Operating leverage—double-edged sword: In tech, a little change in sales creates a big swing in profit. Normalizing EPS without understanding this leverage can lead to wild mispricing when growth cools.
• Normalization or new plateau?: Is last year’s EPS the peak, or just a step on a higher staircase? Only a sector-savvy lens reveals the truth.

Consumer Staples: Where Normalization Still Wears a Tie

In contrast, the world of consumer staples—think food, beverages, household goods—loves a good normalization. Demand is steady, pricing power endures, and shocks are usually more about costs than revenues. Yet, even here, cracks show:

• Input volatility: Commodity price spikes may not revert for years.
• Brand power tested: The great inflation test has revealed which brands can really pass through costs—don’t normalize blindly.

The Perils of Abstracting Away Reality: Where Models Betray

Financial models crave stability, but the real world doesn’t oblige. Relying on normalized EPS as your guiding star, especially in sectors battered by shocks, can lead you into subtle but devastating traps:

• False confidence in valuation multiples: A “normalized” EPS that never arrives makes today’s P/E ratio a work of fiction.
• Sector rotation gone wrong: Allocating capital on the basis of flawed normalizations can mean buying into value traps or missing real inflections.
• Ignoring structural change: Sectors like energy, travel, and real estate have been permanently altered by shocks. What’s normalized in 2019 may be obsolete in 2024.

Lessons from the Edge: Don’t Let Normalization Numb Your Senses

The best analysts know when to trust the averages—and when to interrogate them. In post-shock economies, “normal” is a moving target, and normalization is a tool best used with skepticism and sectoral insight.

Because in today’s market, what you call normal might just be the next big risk.