Is an Earnings Recession Really Coming?

Morgan Stanley says yes, CFRA says no.

Everyone believes that this year’s first quarter will be a bust, with negative earnings growth for companies. But the bigger question is whether there will be two down quarters in a row. Because that constitutes an earnings recession.

Opinions diverge. Michael Wilson, Morgan Stanley’s chief US equity strategist, contends that the S&P 500 will see earnings declines in 2019’s first through third quarters, compared to their year-ago periods. He expects profit margins to contract over that time span. Of course, comparisons to 2018 are tough to beat, as earnings were vaulting then.

Wilson wrote in a research note that in last year’s final period, companies beat earnings estimates by just 3%, a lower than usual rate.

Meanwhile, CFRA’s chief investment strategist, Sam Stovall, contends that the negative earnings will be confined to just the first quarter. And the analysts’ consensus backs him on that. His prediction: -2.7% for the first quarter, then 0.7% growth in the second, followed by 1.7%, and 8.6% in the fourth.

The last time an earnings recession happened was in 2015’s last quarter and 2016’s first, when plummeting oil prices had a ripple effect in other parts of the US economy.

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