“The estimated (year-over-year) earnings decline for Q3 2019 is -3.8%, which is below the 5-year average earnings growth rate of 7.3%. If -3.8% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year declines in earnings since Q4 2015 through Q2 2016. It will also mark the largest year-over-year decline in earnings reported by the index since Q1 2016 (-6.9%).” - Factset

For the past couple of months we have drawn strong parallels with the 2015-2017 period side-by-side with the 2018-2020 period.The basic premise was that S&P 500 earnings (along with price) were sideways to flat for 2015-2016 period.Price began to take off in late Q3/early Q4 2016 in anticipation of the earnings jump in 2017 (despite having 3 quarters of negative earnings growth preceding it). Here is the article that explains the data:

Earnings did in fact meet positive expectations in 2017 jumping 11.97% from 2016-2017.From Q4 2016 lows, to Q1 2018 highs, price surged 36% (following 3 quarters of negative earnings growth in 2016).

For CY 2020, analysts are projecting earnings growth of 10.6% and revenue growth of 5.6%.

What is interesting when you ask the question of whether we will get a similar run (price) to what we saw in 2017 are the following 2 facts:

1. The average price appreciation following the 2/10 inversion of the yield curve to market peak (~18 months after inversion) is mid-30’s%.We inverted last month.

2. We have gone from a tightening environment in 2018-early 2019 when the market churned sideways, to an easing cycle which the discount rate has already come down 50bps.Just as it took 6 months to feel the economy slow after they stopped tightening, it will take a few months to feel the economy stabilize and heat up after initial loosening.

So is the 3 quarters of negative earnings bad news? It depends if you are looking in the rear view mirror to see what’s behind you, or through the windshield to see what’s ahead…