Just as what constitutes an economic recession is debated, what qualifies being an earnings recession can also be unclear.
The threat of these an event has been discussed at length previously year, but investors could be wise to pay just a little closer attention because the S&P 500 has delivered two consecutive quarters of negative growth.
Dubravko Lakos-Bujas, a U.S. equity strategist at J.P. Morgan, expects the earnings rout continues for another two quarters a minimum of.
Average earnings growth forecasts for the U.S. equity benchmark currently spend time at -5.3 percent for Q1 2016 and -0.7 percent for Q2.
“Buybacks happen to be and certain continues to provide synthetic support to EPS, which enhances the question of underlying organic growth,” Lakos-Bujas told clients.
He noted that S&P 500 companies have actually produced four consecutive quarters of negative sales growth, and net income margins are starting to contract for the first time in this recovery.
The strategist also highlighted how this data points to an elevated risk of an economic recession.
He looked at 115 many years of data and found that consecutive quarters of negative EPS growth happen to be closely followed by, or coincided with, an economic recession 81 percent of times (or 22 of 27 profit cycles).
During the other times, either monetary and/or fiscal stimulus was used to aid a pickup in growth before an economic downturn eventually ended the cycle.
“This means that to prevent the end of the current corporate profit cycle, we might require a fresh injection of some form of stimulus (weaker U.S. dollar, additional QE, increase in government spending, etc.),” Lakos-Bujas said.
He also warned that J.P. Morgan’s Quantitative Macro Index is now in a level that has historically been associated with a 64-per-cent possibility of a bear market.