Year-over-years earnings for US companies have been rising since Cro-magnon man emerged from the forests of Europe 40,000 years ago. It appears that the streak is coming to an end.
Based on data from Reuters "projections for S&P 500 companies’ fourth-quarter earnings swung to a 6.1 percent drop on Monday from an 11.5 percent rise on October 1, in the biggest quarterly move since Reuters Estimates started compiling analysts’ forecasts in 1999." Tech company earnings are still expected to rise 25%, but that is the extent of the good news.
The impact on the stock markets could be significant.
The S&P 500 is only up a modest 18% since the beginning of 1999. This is due, to some extent, to the huge drop the index suffered in 2002. It points to a stock market which has not performed as well as earnings have. It is, is essence, more fragile than the corporate results which have driven it.
The index sits just shy of 1,500 and has taken a big run-up since mid-2006. It is not hard to believe that a contraction of earnings growth would take it to 1,200 which is about where it was eighteen months ago.If the economy has entered a recession, investors should be happy if it does not go lower.
Douglas A. McIntyre
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