“Unless analysts are much more accurate than usual”, the S&P 500’s profits recession should be over, says the FT’s John Authers. Following five quarters of contraction, profits are expected to have slipped by another 0.8% in the third quarter of 2016. But as analysts are usually “unduly pessimistic” to the tune of more than 3%, the final figure should turn out to be marginally positive. “It will have been the shallowest earnings recession on record, and also the only one not accompanied by a US recession or an equity bear market.”
That’s partly because it was less significant than it looked, as Ben Levisohn points out in Barron’s. It largely reflected the slide in energy-sector profits amid the fall in oil prices. Strip out energy, and earnings expanded in three of the past four quarters. Similarly, S&P 500 profits margins slipped by 2% in the past year and a half, but take energy out of the equation, and margins have remained stable.
Nevertheless, it’s hard to see profit growth taking off from here; the 10%-plus earnings growth pencilled in for next year will, as ever, be revised down as January approaches. According to Bank of America Merrill Lynch, only 21 S&P firms issued earnings guidance in the run-up to this earnings season, the lowest for any month since 2000, as Steven Russolillo notes in The Wall Street Journal. They are waiting to see what happens in the election, and this is likely to temper corporate investment over the next few months. Overall economic growth remains tepid and the dollar has strengthened; the S&P 500 firms make around half their sales abroad.
Throw in high valuations, and stocks may struggle from here. But they are unlikely to slide. Interest-rates remain close to zero and companies are showering investors with money (instead of investing it). The S&P 500’s total yield (the percentage of cash being returned to shareholders through buybacks and dividends) is around 4.7%, more than the 4.2% on corporate debt. US equities are set to muddle on.