Peak Earnings vs. Peak Earnings Growth: An Important Distinction

Peak Earnings vs. Peak Earnings Growth: An Important Distinction
January 21st, 2019

In our 2018 Year End Commentary / 2019 Outlook published earlier this month we noted a handful of dominant factors that we believe negatively impacted Q4 ’18 market returns and will likely continue to be influential in the new year. Among these factors is the concept of “Peak Earnings”. In other words, the fear that earnings can not or will not improve year over year. With 2018 earnings coming in at an astounding 20%+ growth rate buoyed by tax cuts and share buybacks, there is little doubt that 2019 will see a reduced rate of growth in earnings. However, slower growth in earnings (peak earnings growth) should not be confused with an outright decline in earnings (peak earnings). Consensus estimates for 2019 S&P 500 earnings currently sit at about $169, or a growth rate of 6% from 2018. While this rate of growth may seem disappointing compared to the 20%+ 2018 growth rate, it is a reasonable level of growth and should give equity markets the opportunity move higher in 2019.

As you can see from the chart above, 2019 will not be the first time we have experienced peak earnings growth. According to Richard Bernstein Advisors, “we have had 11 peaks in profit growth since 1980. In all but one of those instances (91% of the time), returns over returns over the subsequent six and twelve months were positive, with average returns of 9% and 18% respectively. We actually had peaks in earnings growth as recently as 2013 and 2017 and both were followed by periods of very strong returns.”

Assuming consensus estimates are directionally accurate, we will not experience peak earnings in 2019. Of course, estimates can (and will) be revised up or down, and other influencing factors could cause 2019 to be the 2^nd occurrence since 1980 to experience negative returns following peak earnings growth. However, the data supports further, albeit slower, earnings growth.

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