What you need to know about the “Earnings Recession”

You’ve been hearing the term “earnings recession” a lot lately, no doubt. And for good reason, we’re totally having one.

If we define the term as two consecutive quarters during which S&P 500 earnings decline year-over-year, then the current earnings recession began in Q3 2015 and is still ongoing. We’re in the third consecutive quarter of year-over-year earnings declines.

The good news is that this doesn’t meant the world is coming to an end. Hell, it doesn’t even mean the recent rally will necessarily end.

Thanks to some very high-quality research from LPL Financial’s Anthony Valeri, you can consider the following:

Yes, the market is experiencing an earnings recession going on three quarters, but it’s coming from the energy and materials sectors, which are minor parts of the market on both an absolute basis and relative to history. Financial and Consumer sectors are only into their first quarter of declining y-o-y earnings and the remaining six sectors are still showing EPS growth.

More importantly, there is a history for this sort of thing that isn’t especially dour. There have been 12 earnings recessions since 1954 and 3 of them did not accompany an actual economic recession. The instance that occurred in 1985-86 for example, was caused by a sudden drop in oil prices (sound familiar?) and occurred in the midst of a period of economic expansion.

Below, Valeri’s chart showing what became of stock market returns during previous earnings recessions:

Josh here – the key is to understand that these things can drag on for awhile, depending on the structural causes. The 1990 earnings recession, for example, lasted for 11 straight quarters of almost three years! As you continue to hear the term, it’s important to keep this context in the back of your mind.

12 instances of earnings recessions in six decades is not an anomaly, it’s a normal part of the cycle.

Source:

Earnings Recessions
LPL Financial