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A Deep Earnings Recession Could Crash The S&P 500: Economist

Last Updated September 23, 2020 1:31 PM
W. E. Messamore
Last Updated September 23, 2020 1:31 PM
  • Wall Street analysts expect corporate earnings for S&P 500 companies to decline for the fourth straight quarter once all the reports are filed.
  • An economist writing for CNN Business says, “That’s not exactly a recipe for stocks to rise.” He warns Wall Street bulls have overbought stocks.
  • A financial analyst for a Chicago hedge fund says clients are asking: “How long can this last?” and “Is a recession coming?”

An earnings recession is two back-to-back quarters of year-over-year declining corporate earnings. A streak of corporate earnings declines preceded the Great Recession .

It deepened dramatically after the GDP recession started. But even then falling earnings relative to GDP weren’t so sustained and consistent as they were in 2019.

Wall Street analysts expect corporate earnings to decline again for the fourth quarter of 2019 . That means S&P 500 companies have been in a recession for a year now:

For Q4 2019, the blended earnings decline for the S&P 500 is -2.1%. If -2.1% is the actual decline for the quarter, it will mark the first time the index has reported four straight quarters of year-over-year earnings declines since Q3 2015 through Q2 2016.

But the stock market is shrugging it off.

Stocks ‘Eerily Calm’

The bulls are unfazed by this earnings drought. David Goldman, an American economist and regular CNBC guest, says stocks are “eerily calm.” 

As earnings continued to dry up through the third quarter , the stock market pushed to new records. But Goldman warns “stocks may be due for a letdown soon.”

He cites an investor note from Craig Johnson, chief market technician at Piper Sandler:

Stocks are overbought by a wide margin… Compared with historical price-to-earnings ratios, stocks are more expensive than at any point in the past 12 months.

Johnson advises clients to “wait on the sidelines until stocks fall again.”

Dow Corporate Earnings Mixed

Earnings from some Dow Jones components are also slipping, leading the benchmark to pull back Thursday . Wuhan coronavirus fears are partly to blame.

But markets are also responding to a Procter and Gamble (NYSE:PG) miss , mixed news from Travelers (NYSE:TRV) , and total panic over Boeing (NYSE:BA) .

Recession ‘Angst’ Mounts

Brian Gilmartin, a financial analyst for Trinity Asset Management says there’s plenty of client “angst”  to go around lately:

Two consistent questions from clients: 1.) How long can this last ? (i.e. S&P 500 strength), and 2.) Is a recession coming?

Gilmartin predicts the next recession “could be tough.” But he doesn’t expect a repeat of 2008. He likens that recession to the Great Depression, a “generational event.”

The S&P 500 Isn’t Pricing in Earnings

Barron’s reports, “Here’s What History Says Comes Next ,” after an annual corporate earnings decline. The article notes that S&P 500 made big gains in years following earnings drops.

s&p 500 corporate earnings decline performance
Source: FactSet via Barron’s 

But 2019 and 2020 are different. The stock market had already priced in corporate earnings data  in these previous examples.

The stock market plummeted in 2001 and 2008. And it traded sideways in 2015. The S&P 500 charted exuberant records as earnings fell through 2019. With corporate earnings so weak, the huge stock gains are setting up markets for a crash once reality hits.

Disclaimer: The opinions and reports in this article do not represent investment or trading advice from CCN.com