What It Means to Emerge From an Earnings Recession

Mark Hulbert says enough companies have reported that we can be confident the earnings recession is over.
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Time to celebrate? No, I am not talking about Tampa Bay fans. I am referring to the S&P 500 emerging from its earnings recession. Such a recession, of course, is defined as two consecutive quarters of declining earnings per share. Enough companies have reported in the current earnings season to allow some confidence in declaring that the recession is over.

As of Feb. 5, according to FactSet, 59% of the companies in the S&P 500 had reported their earnings. Combining the “actual results for companies that have reported and estimated results for companies that have yet to report, [the] earnings growth rate for the fourth quarter is 1.7%.” If that estimate turns out be accurate, “it will mark the first time the index has reported year-over-year earnings growth since” the fourth quarter of 2019.

Recent history certainly suggests that this is indeed something to celebrate. Think back to the end of the Great Financial Crisis (GFC) in 2009. Over the five years subsequent to the S&P 500 emerging from that earnings recession, it produced an inflation- and dividend-adjusted return of 13.9% annualized. That’s more than double the long-term historical average.

Unfortunately, what happened subsequent to the GFC is more the exception than the rule.

Consider what I discovered upon analyzing all quarters since 1871 in which the S&P 500 emerged from an earnings recession. Before the current period, I counted 36 such occasions. The stock market did not produce above-average returns over the 1-, 5- and 10-year periods subsequent to those 36 occasions.

The table below summarizes what I found upon analyzing the historical data, courtesy of Yale University’s Robert Shiller.

S&P 500’s dividend- and inflation-adjusted annualized return over…

Subsequent yearSubsequent 5 yearsSubsequent 10 years

All quarters since 1871 in which stock market emerged from an earnings recession




All other quarters since 1871




Notice the insignificant differences between the two rows of returns. The biggest difference emerges at the one-year horizon, but even that is not significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.

There are a number of factors that account for these surprising findings. One is that the stock market is forward-looking. Some of the most explosive gains come when the stock market is still in an earnings recession but nevertheless sees light at the end of the tunnel. By the time the earnings recession’s end becomes official, the stock market has long since shifted its focus further on down the road. This is one of the reasons why Wall Street analysts often say “buy on the rumor, sell on the news.”

Another reason the stock market doesn’t react more favorably to the official end of an earnings recession: Stock returns are a function not only of earnings, but price-earnings multiples as well. If P/E ratios decline while earnings growth accelerates, for example, the market itself may end up just treading water.

To illustrate the tenuous relationship between earnings growth and the stock market’s return, I refer to a fascinating thought experiment conducted recently by Vincent Deluard, Global Macro Strategist at investment firm StoneX. Deluard wanted to know how much you would have beaten the market if you had had perfect foresight into what the final GDP number would be four quarters in advance. In the current instance, that would mean knowing what the U.S. GDP would be in the fourth quarter of 2021 -- a number that we won’t in fact know with any finality until near the end of the third quarter of 2022. Deluard nevertheless found that this remarkable clairvoyance would only marginally improve your performance.

Specifically, he calculated the returns of a hypothetical portfolio that would be 100% invested if GDP growth four quarters hence was faster than in the current quarter; otherwise this portfolio would be in cash. Since the late 1940s, this portfolio would have beaten the S&P 500 by less than an annualized percentage point.

The bottom line? It’s undoubtedly good news that the stock market has emerged from its earnings recession. But that’s not a good reason to throw caution to the winds.