Similar Set Up To 2000 & 2008 Or 2016?

According to The Earnings Scout, as of February 14th, Q1 and Q2 earnings estimates call for 0.85% and 2.54% growth. That’s down sharply from the start of the year where estimates when for 5.54% and 5% growth. As you can see from the chart below, earnings estimates have cratered while stocks have soared.

89.8% of S&P 500 stocks are above their 50 day moving average which is 4.4% away from the highest level of this expansion (2016) and the highest level since at least 2003. This scenario is similar to that peak in 2016 because stocks were rebounding after a recession scare. A dovish global central bank shift in 2016 helped allay recession fears. This time we had the Fed shift dovish in late December.

Looking at this pessimistically, this scenario is also similar to the period leading up to 2000 and 2008 because the slope of earnings estimates has been negative for 2 years while stocks are near their record highs.

There Might Not Be A Recession

Many retail investors might worry that the potential for earnings to decline in the first 2 quarters of 2019 means an economic recession is coming. That’s far from the case. As you can see from the chart below, 4 of the past 6 earnings recessions didn’t coincide with an economic recession.

These earnings recessions not in economic recessions occurred during slowdowns. There have been more mid-cycle slowdowns lately because expansions have gotten longer. We aren’t sure if the propensity for longer cycles is a trend or a coincidence because there’s not much data to work with. The two longest expansions, which are the 1990s one and the current one, skew the post-WWII average higher.

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