Stocks staring at earnings recession fuel clash

While the two strategists are at odds on the trajectory, they say the coming profit slump won’t necessarily kill the bull market. Wilson pointed to lower interest rates as a buffer that supports equity valuations. That is, even as profits contract, an expansion in the price-earnings ratio would be able to absorb the blow.

At 16.2 times forecast profit, the S&P 500’s multiple is down from a peak of 18.5 in 2017, trailing its five-year average. expectations could be setting up for a noticeable positive surprise.”

The market has “already figured this out. We’re not that bearish on stocks,” Wilson said on Friday.

Belski studied the 15 earnings cycles during the past seven decades and found the stock market has tended to rise even after the start of a profit recession. In the six and 12 months after one began, the S&P 500 on average climbed 3.4 per cent and 13 per cent, respectively.

The last one, beginning in mid-2015, brought five straight quarters of shrinking income. While the S&P 500 suffered two 10 per cent corrections over that stretch, stocks returned to record highs in July 2016.

Right now, US stocks are bouncing back from their worst December since the Great Depression. Up for seven out of the past eight weeks, the S&P 500 has extended its postChristmas rally past 17 per cent.

“Whether stocks can advance sustainably from here will be determined by the depth and timing of this trough in earnings growth,” Wilson wrote.