The US “Earnings Recession” is Not Registering with Investors

The US “Earnings Recession” is Not Registering with Investors

The US “Earnings Recession” is Not Registering with Investors


The US earnings recession should be dampening the 7-year-old Bull Market, but it is not registering with investors.

Quarterly profits in the S&P 500 Index are about to fall yet again, extending a streak of declines poised to match the longest earnings retreat on record, data compiled by S&P Dow Jones Indices show.

At the same time, net income in the gauge is down 18% from its Y 2014 high, a retreat that is less than 50% the size of the last declines declines and pales next to the 28$ average in recessions since Y 1936.

While the lack of profit growth explains why the S&P 500 has struggled to advance, the less-heralded shallowness of the decline is Key to understanding the market’s resilience.

The equity benchmark just posted a 2nd week of gains following the Brexit selloff in late June ending Friday within a point of a record after recovering from 2 separate 10% corrections in 10 months.

Investor faith that earnings will rebound is visible in another market metric, valuations, which have widened as the profit recovery was repeatedly pushed back.

At 25X reported profit using standard accounting, the S&P 500 trades at a higher multiple than it has 90% of the time in the past 80 years. The average ratio is 17X.

Based on profit calculated under GAAP (generally accepted accounting principles), S&P 500 companies have posted negative growth for 6 straight Quarters, a stretch that has been exceeded only 1 time  Y since 1936. That was the 7-Quarter slump of the Y’s 2007-2009 Great Recession.

While the duration is almost unprecedented, the decrease in 12-month income from $106/share in September 2014 to $86/share in March this year is well short of what happened during the worst recessions.

In 4 instances, S&P 500 profit slumped from “peak to trough” by at least 36%, a rate that’s 2X the current pace.

Analysts projected earnings excluding some items for the S&P 500 to drop 5.7% in Q-2 after slumping 6.7% in Q-1 of this  year. Companies are expected to boost profits in 2-H, with income rising 14% next year to $133/share. Should that mark happen, it would exceed the annual record of $119/share reached in Y 2014.

Unlike the last recession where the earnings slump was spread across almost every industry, this one is centered on the commodity space.

Twelve-month income from energy producers have plunged by $189-B since Y 2014, compared with $187-B in lost profit for the whole of the S&P 500.

Holding up earnings are consumer discretionary and healthcare companies, which have expanded profit by at least 11%. Banks also contributed, with income climbing 6%.

The S&P 500 stock index set record intra-day and closing highs Monday on a follow through of Friday’s action.

Monday, the US major market indexes finished at: DJIA +80.19 at 18226.93, NAS Comp +31.88 at 4988.64, S&P 500 +7.26 at 2137.16

Volume: trade was light with about 789-M/shares exchanged on the NYSE

  • Russell 2000 +4.8% YTD
  • DJIA +4.6% YTD
  • S&P 500 +4.6% YTD
  • NAS Comp-0.4% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.31) Neutral (0.19) Very Bullish (0.50) Bullish (0.25)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.25) Bullish (0.25) Bullish (0.35) Neutral (0.14)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Bullish (0.34) Neutral (0.23) Bullish (0.48) Bullish (0.31)
heffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.30) Neutral (-0.19) Bearish (-0.33) Bearish (-0.38)

Stay tuned…


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