Earnings Recession Deepens

“If you just exclude all the bad stuff, earnings look quite good.” 

This has been the primary rhetoric by mainstream analysts during the past quarter’s earnings reporting season. It is true. If we just take out the impact of the rising dollar, falling oil and commodity prices, weak consumer spending, and the inability of rampant stock buybacks to boost bottom line earnings, reports have not been that bad. 

However, the reality is that the decline in earnings, and particularly the decline in forward earnings estimates, suggests that something more pervasive is happening in the economy. As noted by Political Calculations this past week:

“In the chart above, we confirm that the trailing twelve-month earnings per share for the S&P 500 throughout 2015 has continued to fall from the levels that Standard and Poor had projected they would be back to in August 2015. And for that matter, what they forecast they would be back to in May 2015, February 2015 and in November 2014.

The deterioration in the S&P 500’s earnings per share has finally drawn the attention of Reuters, which notes that the earnings of U.S. companies in the third quarter, which were just reported, were the first to be outright negative as opposed to being less and less positive.

The previous recession in the S&P 500’s trailing year earnings per share, which ran from 2012-Q2 through 2013-Q1, coincided with economic growth in the U.S. economy stalling out to near-zero levels, a fact that has become more and more apparent with each year’s comprehensive revisions to the nation’s GDP, where estimates of the real growth rate have been consistently reduced below their originally reported figures.

The current trailing year earnings recession is of a considerably greater magnitude. We would, therefore, expect to see larger downward revisions in estimated GDP growth for the period from 2014-Q4 through at least 2016-Q1 as the U.S. Bureau of Economic Analysis’ annual GDP revisions are released.”