One characteristic of recent stock market action is extreme correlation. Chart 1 shows that during the sharp market decline following the COVID-19 arrival in the U.S. and the V-shaped upturn thereafter, the average correlation of S&P 500 constituents moved to near its highest level measured back to 1986.
We view the coronavirus pandemic as the final straw that tipped an already vulnerable U.S. economy into recession, rather than the watershed event that will change the way we view growth, profitability, and even the nature of work itself. But even economic “optimists” like us need to recognize that the recovery back to last cycle’s earnings peak will be a long and grinding one. There’s a good chance that the four-quarter trailing S&P 500 GAAP Earnings Per Share cycle peak of $139.47 will not be exceeded until 2023 or 2024 (Chart 1).
Our earnings waterfall analysis for the fourth quarter tells a story consistent with the entirety of 2018: earnings growth was fantastic, boosted by the twin drivers of strong sales growth and a lower corporate tax rate. Chart 1 spotlights the quarter’s tally, which produced a healthy sales growth number despite some economic weakening.
Growth Is Re-emerging: A recurring theme in recent Leuthold Group research is the apparent turn in corporate profits and a general improvement in business results. To monitor corporate sales/earnings trends, we measure the number of companies reporting higher quarterly sales and earnings than a year ago, versus companies reporting lower sales and earnings.
We’ve said before that one of Wall Street’s great inventions is the “forward operating earnings” estimate for the S&P 500, because it results in a P/E ratio that invariably sounds reasonable (if not outright cheap). But this already-misleading EPS metric has become even more so in recent years because of the proliferation of non-GAAP “adjusted EPS” reporting practices.