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July 03, 2019 @ 11:10 +03:00
Corporate America has a summer horror flick for you: an earnings recession. An earnings recession is two successive quarters of earnings-per-share decline. Such a decline is projected to not only have occurred in the second quarter of 2019, but is also forecast for the third quarter.
In fact, earnings recession fears may be overblown, as the stock market historically tends to do better when earnings are declining than advancing. That’s because an earnings recession increases the likelihood that the Federal Reserve will reduce interest rates. And, unless corporate profitability falls completely out of bed, investors love lower rates more than they hate slower earnings growth.
The last several quarters are a textbook illustration. During the fourth quarter of 2018, when corporate profits were mushrooming, the S&P 500 SPX, +0.29% slid 14.0%. In the first quarter of this year, in contrast, when the year-over-year EPS growth rate was negative, the S&P 500 rose 13.1%. In the second quarter, for which FactSet projects the EPS growth rate to be minus 2.6%, the S&P 500 added another 3.8%. When year-over-year earnings growth was above 20%, in contrast, the S&P 500 gained an average of just 2.6% annualized.