The S&P 500 is officially in an earnings recession for the first time in three years, and the trend is expected to get worse in the third quarter.
The entirety of the S&P 500 index SPX, +0.03% has reported results for the second quarter, showing an average earnings drop of 0.35%. Components posted a 0.29% decline in earnings per share in the first quarter, marking the first period of back-to-back declines since the second quarter of 2016. Earnings recessions are typically categorized as two straight quarters of falling earnings.
Analysts surveyed by FactSet currently project a steeper drop for the third quarter, with estimates calling for a 3.95% decline on average. Sentiment has worsened since the start of the year, as analysts had been projecting a 1.07% increase in third-quarter earnings as of late March. But they expect things to turn positive again in the holiday period, with expectations for 1.3% growth overall in the calendar year.
Some of the worst-performing companies for the second quarter were in metals and mining, with earnings for that subsector down 76% on average amid falling prices and rising costs for companies like Freeport-McMoRan Inc. FCX, -0.48% . The materials sector overall saw a 17.88% decline, led by weakness in mining that’s projected to persist for another quarter.
Read this paragraph carefully:
Since last year real GDP growth has been slowing. The chair of the Federal Reserve has been signaling that, while growth is slowing, there is no recession risk and the Fed is forecasting continued positive growth. Warning signs in the economy, including an inverted yield curve, have been ignored and stock markets continued to make new highs in July. In August a correction took a place and subsequently a rally ensued into early September. On September 18 the Fed is expected to cut rates.
What’s so special about this? This is hardly news. Except that this paragraph would be as true for the U.S. economy and stock market in September 2007 as it is today. Consider that 12 years ago the yield curve was inverted and U.S. economic growth was markedly slower than it had been in 2006. Yet the Standard & Poor’s 500 SPX, +0.03% made a new high in July 2007 (same as 2019), there was an August correction (same as 2019), and then the Fed cut rates on September 18 (ditto — same day even).
U.S. stocks proceeded to make another marginal high that October — and that was it. Lights out. We all know what happened next.
It seems we are at a curious moment in time. Parallels to late 2007 are running through the markets now. This doesn’t mean the market’s fate will play out as it did then, but the ingredients are there and all that’s needed is a trigger. Perhaps the trigger was the attack on Saudi oil installations last weekend. It’s too early to tell, but clearly this is something to keep in mind.
Markets topped in October 2007 following the Fed’s September rate cut. That November, Ben Bernanke, then Fed chair, said there wouldn’t be a recession. According to a November 2007 Reuters report, Bernanke told a congressional committee: “Our assessment is for slower growth, but positive growth, going into next year.” The U.S. economy entered recession in December 2007.
Bernanke November 2007:
"Federal Reserve Chairman Ben Bernanke told lawmakers on Thursday the U.S. economy did not appear headed for recession.
Our assessment is for slower growth, but positive growth, going into next year”
Recession starts December 2007t.co/icu7dY0XW3
— Sven Henrich (@NorthmanTrader) September 16, 2019