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Jan. 22, 2020, 12:54 p.m. EST

Earnings recession should end with a fourth-quarter comeback

S&P 500 earnings estimates are still negative, led by the energy sector, but history suggests a swing to positive is likely

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By Tomi Kilgore, MarketWatch

Getty Images

The earnings recession of 2019 will soon be over, as history suggests investors can count on a fourth-quarter comeback that flips the earnings growth outlook to positive from negative.

Aggregate earnings for S&P 500 companies /zigman2/quotes/210599714/realtime SPX -0.38%  fell from a year ago for the first three quarters of 2019, matching the three-quarter streak of declines ending with the second quarter of 2016, according to FactSet data. A recession is generally defined as two-straight quarters of declines.

As the earnings-reporting season gets under way, it’s understandable if investors are worried. With about 10% of the S&P 500 having reported results through Tuesday morning, the aggregate blended growth estimate, which tracks earnings already reported and the average analyst estimates of coming results, is indicating a 2.3% decline, according to FactSet.

That’s worse than the 2.0% decline projected just before the start of earnings season, which unofficially began when J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM 0.00%  released results before the Jan. 14 opening bell. (See the sector breakdown of estimates below.)

Don’t miss : Earnings recession is expected to swallow all of 2019 after holiday forecasts disappoint.

But Sam Stovall, chief investment strategist at CFRA suggests investors can relax.

“[I]nvestors shouldn’t get too worked up just yet, because Q3 was the 31st consecutive quarter in which reported EPS change exceeded the estimated EPS change,” Stovall wrote in a recent note to clients. “In addition, in those prior 31 quarters, actual results outpaced forecasts by an average of 3.8 percentage points.”

If history repeats, or even just rhymes, the recession will be over, as earnings growth could come close to 2%.

/zigman2/quotes/210599714/realtime SPX 3,373.23, -12.92, -0.38%

There’s a chance growth could end up better than that, as analysts have been more pessimistic than usual, amid uncertainty over the negative impact from U.S.-China trade tensions and slowing overseas growth.

On a per-share basis, estimated earnings were reduced by 4.7 percentage points from Sept. 30 through Dec. 31, a larger cut than the five-year average of 3.3 percentage points. In comparison, of the 107 companies that issued EPS guidance during the quarter, 68% issued negative guidance, slightly below the five-year average of 70%.

This discrepancy is highlighted by the energy sector, which is set to pace the earnings decliners by a blended growth estimate of a negative 42.8%. As CFRA’s Stovall says, that decline “seems a bit exaggerated,” considering how crude oil prices were down only slightly from a year ago.

The average price of crude oil futures /zigman2/quotes/209723049/delayed CL00 -0.89%  during the fourth quarter of 2019 was $56.87, down 4.4% from the average of $59.48 in the fourth-quarter of 2018.

/zigman2/quotes/209723049/delayed CL00 53.40, -0.48, -0.89%

And the first S&P 500 energy company to report results, which was Schlumberger Ltd. /zigman2/quotes/201012972/composite SLB -1.34%  on Friday, reported adjusted earnings growth of 8.3%, according to FactSet, compared with a pre-results consensus of a 0.1% decline.

-12.92 -0.38%
Volume: 2.03B
Feb. 20, 2020 5:10p
$ 137.49
0.00 0.00%
Volume: 7.42M
Feb. 20, 2020 6:30p
P/E Ratio
Dividend Yield
Market Cap
$431.24 billion
Rev. per Employee
US : U.S.: Nymex
$ 53.40
-0.48 -0.89%
Volume: 46,887
Feb. 21, 2020 1:22a
$ 33.83
-0.46 -1.34%
Volume: 7.84M
Feb. 20, 2020 6:30p
P/E Ratio
Dividend Yield
Market Cap
$47.48 billion
Rev. per Employee
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