Earnings…Does Anyone Care?

When I was in the investment business, we were taught that the most important factor driving the stock market was corporate earnings. The stock market has essentially been on a tear higher since February 11, 2016. So, earnings must be doing pretty good, right? Wrong.

Here is the latest data from FactSet. S&Ps earnings are estimated to decline by 4.9% for Q2 2016. If the index does in fact report a decline in earnings for Q2, it will mark the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009, the worst period of the Great Recession. And the estimates are not improving. On March 31, the estimated earnings decline for Q2 2016 was only 2.7%.

A total of 81 S&P companies to date have issued negative earnings per share (EPS) guidance for Q2 while only 31 companies have issued positive EPS guidance.

Here is the chart with the blue S&P earnings line (right axis) falling and diverging negatively from the green S&P price line (left axis):

FactSet - SP 500 Change In Forward 12-Month EPS vs Change in Price

As always, Wall Street is saying that earnings will improve in the second half. Why? The economy is weakening and inventories are very high. One fine day, dear reader, this divergence will matter. Be sure you aren’t the one hoping for something better. Hope is not a strategy.