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AAM Viewpoints – Earnings Recession Likely – Why This Time Might Be Different

First quarter earnings season is upon us and for the first time since the second quarter of 2016, the S&P 500 Index will most likely report a decline in aggregate year-over-year earnings. Piling on, estimates for the second quarter are essentially flat and will likely be revised into negative territory if the downward trend continues. This sets up the possibility of back-to-back quarters of negative earnings growth or an “Earnings Recession” which typically does not bode well for the equity market.      

There are several factors putting pressure on earnings this quarter including continued strength of the US Dollar and a global growth slowdown.  However, the biggest factor could simply be the high-bar that was set in 2018. Quarterly earnings per share (EPS) growth rates for 2018 are shown below. As we can see, it will surely be a hard act to follow…


The last earnings recession lasted four consecutive quarters from 2015 Q3 – 2016 Q2. As we might expect over that time frame the S&P 500 Index was flat with a price return of only 1.73% (06/30/15 – 06/30/16).


While we might see back-to-back quarters of negative earnings growth, there are two major differences between the current environment and the earnings recession of 2015-2016. First, as alluded to previously, S&P 500 constituents have tough comparisons to contend with. That was not the case back in 2015-2016. For example, in 2016 Q2 the S&P 500 posted EPS growth of -2.60% after posting EPS growth of just 0.08% in 2015 Q2. Secondly, the current bottom-line earnings contraction is not coupled with top-line revenue contraction. Revenue for the S&P 500 Index is estimated to grow at 4.90% in 2019. Again, that was not the case back in 2015-2016 when the S&P 500 posted a “revenue recession” of five consecutive quarters from 2015 Q1 – 2016 Q1. Comparing the two periods below, we can see a clear difference in quarterly revenue trends. 



Given the strong start to the year for the equity market, a slowdown in earnings could set the table for increased volatility in the near term. If/when that occurs, it is important to note why this time is different: earnings forecasts for full-year 2019 are still positive despite the tough comparisons, and revenue growth remains robust which is a cleaner indicator of overall corporate health. This leads us to believe any earnings recession fears should be short lived. 

CRN: 2019-0405-7355R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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