Chart of the week

As corporate earnings decline, could stock returns falter?

Our chart of the week paints a sobering picture for equity investors as stocks reached an all-time high despite declining corporate earnings growth.

November 8, 2019 | 2 minute read
  • It could be easy for investors to feel complacent in today’s market environment. The S&P 500 reached a new all-time high this week while equity volatility gradually declined this month. Q3 2019 GDP also handily beat expectations and seemed to ease some of the recession fears that had been prevalent earlier this year.
  • Underneath the recent economic and market optimism, however, a more sobering picture emerges for equity investors. Specifically, corporate earnings growth has moderated significantly this year, driven in part by the waning effect of the 2017 tax law as well as S&P 500 companies reducing their share buyback activity.
  • As the chart highlights, earnings growth saw a recent peak of 22.1% in Q4 2018 but declined in each quarter since, falling to approximately just 8.4% in Q3 2019. It also shows that equity returns historically have closely followed corporate earnings.1
  • Equity markets continue to face a potentially volatile mix of headwinds and tailwinds. Forward earnings estimates in the U.S. show analysts are forecasting a rebound in the coming quarters, though at a significantly slower pace than that of 2018. If history follows suit, investors might prepare themselves for potentially heightened volatility coupled with disappointing equity returns.

  • Bloomberg Finance, L.P., as of September 30, 2019. Data based on year-over-year earnings per share growth of S&P 500 companies and S&P 500 returns based on rolling 4-quarter averages since 1992.

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