S&P 500 Earnings Recession Shows No Signs of Slowing Down

RecessionThe S&P 500 is in an earnings recession and Wall Street doesn’t seem too worried. The blended earnings decline in the first quarter was -7.1% and marks the first time the S&P 500 has seen four consecutive quarters of year-over-year declines in earnings since 2008. Analysts expect earnings growth to return in the second half of 2016, but they said something really similar last year at this time. The U.S. economy is fragile, consumer sentiment is tumbling, and the earnings recession shows no signs of slowing down.

Wall Street Not Worried About Earnings Recession

Do you really need a degree from Wharton to know that earnings growth is good and negative earnings growth is bad? Or that an earnings recession (two or more consecutive quarters of negative earnings growth) does not bode well for the stock market?

What you do need are the same rose-colored glasses Wall Street has, so you can ignore the abysmal first-quarter results.

Roughly 87% of companies in the S&P 500 have reported first-quarter earnings. The blended sales decline for the first quarter of 2016 is -1.6%, a far cry from the forecasted decline of one percent at the end of the quarter, way back on March 31. (Source: “Earnings Insight,” FactSet, May 6, 2016.)

For those who think making money is important when determining the valuation of a stock, the first-quarter blended earnings decline is -7.1%. That’s better than the forecasted estimated earnings decline of -8.7% announced on March 31. But…it’s not quite as accurate as the 0.3% growth predicted at the beginning of the quarter.

The first-quarter blended earnings decline of -7.1% marks the first time the S&P 500 has seen four consecutive quarters of year-over-year declines in earnings since the fourth quarter of 2008.

Ever-optimistic investment managers believe earnings have bottomed and will start to rise, breathing life into the unfairly maligned, down-on-its-luck bull market. On one hand, they have pretty much said the same thing over the last four quarters. Before that, they never even predicted an earnings recession. So I’m not so sure how accurate their crystal balls are.

This Is Why the Earnings Recession Will Continue

Again, markets are only as strong as the underlying stocks that go into making up the index. If the immediate past and present is any indicator of future success, Wall Street is in for another round of disappointments. It’s tough to see how the second half of 2016 is going to save the day when the U.S. economy is barely registering a heartbeat.

Right now, it seems like the magic number is 0.5%.

Federal Reserve Chair Janet Yellen kept the key lending rate unchanged in the range of 0.25% to 0.50%. The Fed cited a slowing U.S. economy, moribund consumer spending, and weak global economy as reasons for its less-than-optimistic take on the U.S. economic recovery. (Source: Federal Reserve Statement, Board of Governors of the Federal Reserve System, April 27, 2016.)

The U.S. economy is stuck in cartoon quicksand. In the U.S., the first-quarter gross domestic product (GDP) advanced an appalling 0.5%. Admittedly, analysts weren’t expecting too much; they forecasted first-quarter GDP to come in at just 0.7%. Still, their weak projections were far too hopeful. It’s almost as if they don’t have their pulse on Main Street America.

How could they, though? Analysts expect economic activity to pick up given the strong labor market. In this case, numbers lie. Yes, U.S. employment rebounded in March with the addition of 215,000 jobs. So, mission accomplished, right?

Not quite. Most of the job gains came from the low-paying retail and food services areas. At the same time, the biggest job losses came from higher-paying mining and manufacturing jobs. The U.S. unemployment rate may be five percent, but the underemployment rate stands at 9.9%. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, April 1, 2016.)

I’m not sure these are the kinds of jobs that are going to help the average American consumer spend their way to national prosperity. In fact, American consumer sentiment is plunging. (Source: “Survey of Consumers, University of Michigan,” University of Michigan, April 2016.)

According to the University of Michigan Consumer Sentiment Index, consumer sentiment has been declining since the beginning of 2015. The index is currently at 89, a 10% decline from January 2015. In a best-case scenario, one where the economy is going to get better, we’d see consumer sentiment increase.

In addition to tired, pessimistic consumers who simply can’t spend what they don’t have, we’ve now entered the typically weakest part of the year. Sell in May and go away? Even if this doesn’t happen, it appears the earnings recession is going to continue.

Investors can normally rely on the markets to warm up as summer turns into fall. Well, that is true, except in an election year. Ghastly earnings and revenues aside, stocks tend to peak about six months ahead of the November election.

The earnings recession is now in its fourth quarter. With no new economic data to suggest the worst is over, there’s every reason to think the earnings recession could stretch into 2017.