Capitulation - Stock Market Reached On Monday

FactSet’s results should show if those predicting an earnings recession 3 months ago still have a leg to stand on. With 90% of S&P 500 firms reporting earnings, FactSet shows earnings fell 0.5%. 

Therefore, even if most of the firms in the final 10%, which haven’t reported as of this calculation, beat estimates, there will likely be a very minimal yearly decline in EPS. I’m guessing the final result will be between -0.3% and 0%.

On the other hand, FactSet shows Q1 revenue growth was 5.3%. This isn’t as much of a downturn as investors expected 3 months ago even if EPS growth ends up being negative 2 quarters in a row. 

To be clear, Q1 could have the first EPS decline since Q2 2016 when EPS fell 3.2%. That wasn’t close to the depths of the 2015-2016 earnings recession. With this year’s comps so high, slight earnings declines aren’t that bad as the 2-year growth stack is still strong.

FactSet’s Q2 estimates are just like The Earnings Scout’s in that they are worse than Q1’s estimates at this point in the previous quarter. 

Capitulation - FactSet already has Q2 earnings falling 1.7%. 

With a bit more of a decline in the next couple months, Q2 would need to beat estimates by much more than average to see positive growth. 

Therefore, FactSet is likely to show 2 straight quarters of very slight earnings declines. The Earnings Scout won’t show 2 quarters of declines unless Q3 estimates fall. In terms of predicting where stocks are headed, Q2 estimates will matter for a few more weeks, and then the focus will shift to Q3 estimates. FactSet’s Q2 estimates fell less than average in April which supports this bull market.

As you can see from the chart below, Q1 was deeply hindered by international business as global economic growth has slowed. The global economy might be in a recession. 

This chart shows firms with more than half of their sales coming from international markets had EPS fall 12.8% and revenue growth of just 0.2%. Domestically focused firms had EPS growth of 6.2% and revenue growth of 7.3%.  

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