Markets are forecasting mechanisms and they typically shift into a weak technical profile for a reason. One possible explanation for the concerning look of longer-term charts is a sharp drop in earnings expectations for U.S. companies. From Zack’s Investment Research:

“We now have three quarters of back-to-back negative earnings growth and this picture isn’t expected to change in the current (Q1) and following (Q2) periods either.”

As shown on the graph below, it is possible the U.S. stock market will have to try to withstand five consecutive quarters of negative earnings growth.

Earnings And Recession Odds

Given the statistics below regarding two consecutive quarters of earnings declines and recessions, it begs the question how will the economy fare if earnings decline for five consecutive quarters? From CNBC:

Since corporate profits turned negative in mid-2015, Wall Street has pondered whether it’s just a passing phase or a signal of something worse. History strongly suggests the latter. Recessions have followed consecutive quarters of earnings declines 81 percent of the time, according to an analysis from JPMorgan Chase strategists, who said they combed through 115 years of records for their findings. The news gets worse: Of the remaining 19 percent of the time, recession was only avoided through either monetary or fiscal stimulus. With the Federal Reserve holding limited easing options and a deeply dysfunctional Washington thwarting a fiscal boost, the prospects for help are not good.

Central Banks Have Limited Ammo

History says the economy has avoided a recession after two consecutive quarters of earnings declines in cases that included some form of monetary (Fed) or fiscal (Congress) stimulus. As described in detail in a recent video, the Fed’s standard procedure for combating economic weakness is to lower interest rates. With rates still hovering around zero, the Fed has limited options in terms of leveraging their standard playbook. Major Wall Street firms are voicing concerns about the depleted arsenals of central banks. From Bloomberg: