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As Earnings Growth Subsides Is Caution Warranted For U.S. Equities?

The earnings slowdown appears to already be here. Now, the arguments evolve, devolve and revolve around whether a deceleration in corporate profits will take stocks sliding with it as well as the U.S. economy.

Analysts now forecast that companies in the S&P 500 index will post aggregate first-quarter earnings per share that are 1.7% below that of a year ago. And while the current forecast for fourth quarter earnings growth of 13.3% year-over-year would mark the fifth straight quarter of double-digit earnings growth, it also would represent the first time that S&P 500 aggregate earnings growth has not been above 20% since the fourth quarter of 2017, according to FactSet. 1

One quarter of earnings contraction (which isn’t in the books yet) does not an earnings recession make (it would take two to be generally interpreted as an earnings recession). But it’s apparent that a wide range of forecasts could potentially be setting up market participants for surprises (negative as well as positive) as the current earnings season winds down and the 2019 earnings season gets underway circa this coming April.

A research note widely reported February 11 from Michael Wilson, Morgan Stanley’s chief investment officer and chief U.S. equity strategist, concluded that the earnings recession has already arrived and investors may not be ready for it. In the note, Morgan Stanley lowered its target for full-year S&P 500 earnings per share to 1.0% from 4.3% based on the number of downward profit revisions during the fourth quarter.

“Our earnings recession call is playing out even faster than we expected,” said Wilson as quoted in this MarketWatch story. “When we made our call for a greater than 50% chance of an earnings recession this year, we thought it might take a bit longer for the evidence to build.” 2

According to a compilation of its own data, as well as that from Refinitiv (formerly Thomson Reuters) and Strategas Research Partners, consensus S&P 500 earnings for the first quarter were cut by an above-average 4.6% in January, LPL Financial says. That was the biggest downward revision in the first month of a quarter since analysts revised earnings lower by 5.3% in the first quarter of 2016.

“Forward-looking guidance has been tepid overall during reporting season, mostly because of the uncertainty surrounding the U.S.-China trade dispute and slower growth overseas,” LPL Financial said in a February 11 weekly market commentary. 3

Compared to Morgan Stanley’s call for 1.0% full-year, earnings-per-share growth, data compiled by FactSet has analysts projecting earnings growth of 5.0% for the S&P 500 ─ topped off by 9.0% growth in the fourth quarter.

Morgan Stanley’s Wilson, though, argues that this type of “inflection” has occurred in the past, though two important factors then aren’t at play this year. Those factors are earnings comparisons against prior-year quarters in which companies reported slow or negative earnings growth and a period in which tax cuts helped lift growth rates.

LPL Financial says tax reform and fiscal stimulus may still provide a lift to economic growth this year, while stock buybacks could boost S&P 500 earnings per share by at least 2.0%. In addition, with the bar now being lowered for quarterly earnings expectations, that should lead to more earnings “upside” surprises.

“We continue to expect mid-single-digit earnings growth for S&P 500 companies in 2019, driven by solid economic growth, fiscal stimulus, modest inflation, and steady share buybacks,” the LPL Research’s investment and equity strategists write. “Although the peak earnings growth rate for this economic expansion is almost certainly behind us, profit growth peaks have historically been followed by several years of economic growth and stock market gains.”


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1 Butters, J. (2019, February 8). Earnings Insight. FactSet Research Systems Inc. Retrieved from:

2 Chang, S. (2019, February 11). Stock market may be in for a rude awakening as earnings growth hits a wall, warns strategist. MarketWatch. Retrieved from:

3 Lynch, J. and Buchbinder, J. (2019, February 11). Key Takeaways From Fourth Quarter Earnings. LPL Research Weekly Market Commentary. Retrieved from:


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