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Lessons From The 1990S About Slowing Earnings Growth

 May 07, 2012 05:16 PM

(By Fisher Investments Editorial Staff)  US and global corporate earnings have grown for nine straight quarters—nearly all big, double-digit quarterly growth. Revenue, a more direct reflection of the growing global economy, has also grown consistently of late. But now, consensus expectations are full-year 2012 earnings growth will be slower than 2011's 15%. In fact, S&P 500 earnings growth was expected to slow to just 3% y/y in Q1 2012 (thus far, actual reports are showing deceleration to about 7.1% y/y growth).[i] This slowing earnings growth seemingly has some concerned global stocks' good start to 2012 may not continue. But our research shows slowing—occasionally even contracting—earnings growth is a frequent phenomenon, occurring more often than not amid a bull market and typically followed by positive equity returns.

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Earnings growth out of a recession is usually strong for a time—recessionary cost-cutting helps firms post big earnings growth even on small top-line sales increases early in economic revival. Then, too, there's the benefit of easy comparisons to the tougher recessionary period. But as companies move out of recession and into expansion, firms largely lose that benefit. Likewise, firms must begin spending to expand production, etc. These factors can mean a few periods of slowing or contracting earnings growth, even though the greater trend still reflects increased profitability.

Since 1937, S&P 500 quarterly EPS contracted year over year 30% of the time. Most (63%) of these earnings contractions occurred during bull markets. But in the 12 months following, the S&P 500 posted an average return of 11.4%. Slowing earnings growth is even more common: Over the same period, S&P 500 year-over-year EPS growth slowed 54% of the time. Most (65%) of these slowdowns happened in bull markets. In the 12 months following these quarters, the S&P 500 posted an average return of 13.6%.[ii]

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Exhibit 1: Frequency of Slowing/Declining EPS Growth and 12-Month Forward Returns



% During Bulls

12m Fwd Returns*

Earnings Decline




Earnings Slow




Source: Standard and Poor's. Average from all periods. Price returns, 3/31/1937-3/31/2012.

The 1990s provide an ideal example showing stocks can still post outsized gains, even when earnings growth is slowing. After dipping in the early 1990s bear market, S&P earnings rebounded rapidly, reaching a peak growth rate of 30% in 1993. Over the next five years, growth rates slowed steadily and earnings contracted in Q3 1998. However, neither the slowing growth rates nor Q3's contraction ended the bull market. The S&P 500 posted a 148% total return from Q3 1993 to Q3 1998, providing steadfast investors with a 20% annualized return. [iii] And the bull market continued until it peaked in early 2000.

Exhibit 2: S&P 500 EPS Growth (y/y), 1990-1999

EPS growth year over year from 1990 - 1999

Source: Standard & Poor's.

Exhibit 3: S&P 500 Total Return, 1990-1999

S&P 500 Total Returns from 12/31/1989 to 12/31/1999

Source: Thomson Reuters, S&P 500 Total Returns from 12/31/1989 to 12/31/1999.

So while slowing (and even contracting) earnings growth might be cause for concern, the reality is it's far from a universal warning sign of a bear market ahead. Following similar earnings pullbacks historically, stocks have in fact demonstrated outsized gains. And the dim expectations of those concerned about slower earnings growth make positive surprises easier to attain—one of many factors boding well for global stocks in 2012.

This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of May 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.

Thomson Reuters, "This Week in Earnings," April 27, 2012.

Standard and Poor's Research Insight, S&P 500 Index Price Returns.

Standard and Poor's Research Insight, S&P 500 Index Total Returns.

source: Market Minder
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


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