The much-predicted earnings slowdown may not end up being that bad for the stock market. While the estimated fourth-quarter growth rate for S&P 500 earnings is 13.1%, it still marks the fifth straight quarter of double-digit increases.
Disappointing earnings lie ahead, no doubt. But they might not be as harsh as some feared. Although analysts project an actual decline in earnings for this year’s first quarter (-2.2%, versus the prior-year period), they also foresee low single-digit growth for the following two quarters (1% in the second and 2.4% in the third, according to FactSet Research.
The reality is that an earnings slide doesn’t always portend a bear market or a recession. The closest the US came was in the middle of this decade, due to an oil-price collapse. Yet the market didn’t cross the threshold into bear territory, nor did the economy enter a recession.
“So why are stock prices continuing to rebound from last year’s Christmas Eve low, now that people are already curbing their enthusiasm for earnings …?” asked Ed Yardeni, head of Yardeni Research, in a note.
The answer: Fears of an imminent recession have fled, owing to the Federal Reserve’s more dovish stance and the possibility of lessening US-China trade tensions. To Yardeni, a financial karma is at work. He pointed out that “investors were robbed of a good year” in 2018. While earnings rose more than 24%, the S&P 500 dropped 6.2%. Up ahead, there’s “some catch-up this year, even if earnings are flat.”
And hey, the analysts may be wrong. Walmart just reported its best holiday quarter in a decade. And this came as overall retail numbers softened for 2018’s final quarter.
For Brad McMillan, CIO of Commonwealth Financial Network, too much over-done pessimism is kicking around nowadays. Consumer spending growth remains healthy, he wrote in a research note, and consumer confidence may have slackened a bit but is still at robust levels. An earnings recession, by his definition, is two sequential quarters of shrinkage. In light of the positive economic metrics, the odds of that happening are hard to feature.
And indeed, last year’s market volatility was certainly vexing, yet it wasn’t ruinous to investors’ portfolios. The market has regained what it lost. Economist Hugh Johnson noted that the late-2018 market correction “was quite average as corrections go.” A correction is a dip below 10%, and Johnson observed that there have been 25 such declines in the Dow Jones Industrial Average since 1890 that didn’t result in a recession.
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Tags: Earnings, Ed Yardeni, Recession, S&P 500