It's a Pretty Lame Earnings Slowdown When You Look Under Hood

(Bloomberg) -- Everyone’s freaking out about paltry profit growth, but a few statistics shows that this year doesn’t quite qualify as a disaster in the U.S.

If you just threw a dart at a list of S&P 500 companies, for instance, you’d still be twice as likely to hit one that saw earnings rise in the second quarter than fall. Yes, the share-weighted average growth rate was depressing -- 2.1% -- but framing it as a recession is a little overbaked.

The dart experiment is a translation of an indicator tracked by Bloomberg Intelligence called “earnings breadth,” plotting companies with rising versus falling income in any given quarter. At 67.7%, the percentage ticked up from 66.9% in the prior quarter, the first sequential increase in a year. More than 95% of S&P companies have reported quarterly results.

“Signs of bottoming in our measure could signal a rosier outlook for stock prices and earnings trends,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “The percentage of companies with higher year-over-year EPS has been a leading indicator of price peaks and tends to confirm lows.”

Most analysts measure the health of S&P 500’s earnings by share-weighted profit growth, but earnings breadth has a good record in pointing to market tops and bottoms. Two months before the S&P 500 posted an all-time high in September 2018, the indicator climbed to 88%, Bloomberg Intelligence data showed. Breadth hit a low of 54.1% in December 2015, two months before stocks bottomed in February 2016.

Of course, an uptick in earnings breadth doesn’t guarantee the worst is over. Analysts expect to see a 2.7% profit drop in the third quarter before earnings return to growth in the fourth quarter. Overall, they expect a 2.7% earnings growth this year and anticipate a 10% expansion in 2020 and 2021.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Chris Nagi, Jeremy Herron

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