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Three Consecutive Quarters of Negative Earnings Growth?


With 3Q-2015 earnings season ramping up this week, many of you have heard by now that earnings growth is expected to be negative for a second consecutive quarter. If these expectations prove to be true, then this will be known as an earnings recession.

3Q-2015-earnings_2015-10If you click on the first graph, then you will see that 3Q-2015 earnings expectations amongst S&P 500 companies have fallen dramatically over the past twelve months. Earnings were expected to increase by almost +13% a year ago but that has since decreased significantly by approximately nineteen percentage points to almost -6%.

Some have downplayed this given much of it is driven by weakness in the energy sector. Nevertheless, growth is negative in many of the sectors. According to Zacks Investment Research (emphasis added): “The Energy drag notwithstanding, there is not much growth elsewhere either, with earnings growth for half of the 16 . . . sectors expected to be in the negative for the quarter.”

Furthermore, this earnings recession does not appear to be limited to just two quarters. The trend of negative earnings growth appears to have stretched into the next quarter, 4Q-2015.

4Q-2015-earnings_2015-10If you click on the second graph, then you will see that 4Q-2015 earnings expectations amongst S&P 500 companies have fallen substantially since the beginning of the year. Earnings were expected to increase by over +11% just ten months ago but that has since decreased noticeably by approximately sixteen percentage points to almost -5%.

Could 4Q-2015 estimates improve? It sure is possible but it seems unlikely. As shown in the second graph, the negative trend of weaker estimates further deteriorated in the past thirty days.

According to Zacks Investment Research: “Current estimates for the fourth quarter . . . will likely fall further in the coming days as companies update their outlook on the earnings calls.” After all, the outlook for negative earnings growth has also expanded into a majority of the sectors. Specifically, 12 out of the 16 sectors are expected to report declining earnings in 4Q-2015. It would appear that U.S. equity markets are entering not just two but three consecutive quarters of negative earnings growth. Please consult an investment fiduciary before making any investment decisions.

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