Jeffrey Kleintop: The Weakest Earnings Cycle in 55 Years

My friend Jeffrey Kleintop, Chief Market Strategist at LPL Financial, is out with a new note this morning that’s probably going to grab a lot of people’s attention. He points out that, from the earnings peak of Q2 2007 through the first quarter of this year, we’re seeing the weakest recovery for corporate earnings in more than half a century…

This has been the weakest earnings cycle in 55 years. Every earnings cycle over the past 55 years has generated about a 7% annualized earnings per share (EPS) growth rate, when measured from peak to peak or from trough to trough. The best multi-year earnings cycle measured from prior peak to the next peak was an annualized 9.1% and the worst 5.6%, with most clustered tightly around the average of 7.3% [Figure 1]. This is notable given the differing levels of inflation, interest rates, and economic growth that companies had to adapt to in each cycle. However, the current cycle — while not yet over — has been much weaker than the average, generating only a 2.8% annualized growth rate from the prior cycle peak in the second quarter of 2007 through the first quarter of 2014.

Most prior earnings cycles had already climbed 50 – 70% above their prior peak at this point in the cycle. However, the current cycle has only exceeded the prior peak by about 20%, which can be attributed to two factors:
* First, the trough in earnings was much deeper, magnified by the severity of the recession. Financial companies wrote off many years of gains in just a few quarters. 

ƒ*Second, the momentum of the earnings recovery over the past few years has been subpar — tracing a much flatter line than in prior cycles.

And here’s his chart:

Screen Shot 2014-04-15 at 6.32.58 AM

Unfortunately, as Jeff goes on to point out, earnings growth is not happening this quarter either – which kind of makes it hard for stocks to resume their marathon run (see: A Low Bar for Earnings – Savita Subramanian’s take from last week). Year-over-year EPS growth for the S&P is expected to flatline this season, having been chopped down from estimates of 5% growth at the start of the year.


The Weakest Earnings Cycle in 55 Years
LPL Financial – April 15th 2014

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