The peak earnings narrative has garnered significant attention this earnings season—in part because of a comment by Caterpillar’s management stating that the first quarter may have been the “high-water mark” for the year. First quarter earnings growth of 26% may be as good as it gets this cycle as cost pressures have started to build and comparisons get tougher in 2019 after the anniversary of the tax law passes. But, does that mean a recession is looming?
We don’t think so. LPL Research Chief Investment Strategist John Lynch notes, “Slower earnings growth after such a strong first quarter is almost certainly in the cards, but history shows that peak earnings growth does not necessarily mean that a recession is right around the corner. In fact, history suggests a recession may still be about four years away.” The numbers in our LPL Chart of the Day below, which lists the last 12 earnings growth peaks going back more than 60 years, illustrate this point. Should this relationship hold, we could expect a recession in mid-2022; that would make the current U.S. economic expansion—at 13 years—the longest ever.
As a result, we are not overly concerned about an earnings growth peak and expect solid growth to continue, albeit at a slower pace. Assuming the economic expansion continues well into 2019 as we expect, while benefits from the new tax law (e.g., capital spending incentives and buybacks) are still cycling through, S&P 500 Index earnings-per-share growth in 2019 may reach, or potentially even exceed its long-term average of 7–8%. Look for more on this relationship and a recap of first quarter earnings season in today’s Weekly Market Commentary, due out later today.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
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