Still in the longest bull market on record, the entire trading community seems confident the bull market will roll over.
If analyst estimates are reliable, we are on the verge of income recession, namely; two consecutive quarters where profit growth was negative compared to the previous year.
First-quarter earnings are expected to fall 0.7 percent, according to Refinitiv, and second-quarter earnings are expected to rise slightly by 3.4 percent and appear to be vulnerable to further downward revisions.
When the income recession goes on, this one so far is quite simple: This is more like flat income growth after two consecutive years.
Regardless, last year's 6.2 percent decline in the S & P 500 was being hailed as evidence that the market had sniffed a decline in income that was imminent. This news is welcomed by the usual rounds of analysts and strategists, many of whom predict a little if there is an upward movement in stocks this year. Especially after 10 percent returned to the market this year.
But does a moderate decline in the market always mean that revenues will plummet? That does not.
Let's be clear, this is not good news. The last time this happened, in 2015 and 2016, the S & P did indeed decline for 2015, even though it was only 0.7 percent.
After revenue growth of 20 percent north in 2018, what is behind this slowdown?
A slowing world economy;
First, moderating economic growth, both in the US but especially abroad. In the S & P 500, around 40 percent of profits are obtained outside the United States, so there is no growth in Europe and a slowdown in Asia triggered by weaker growth in China clearly has an influence on US multinationals.
Second, higher labor costs and basic materials such as steel and plastics harm many companies and affect profit margins.
Finally, there are also sector specific problems. The fall in oil prices at the end of last year (due to the upside) led to estimates of oil profits falling for 2019, and semiconductors facing stiff competition and oversupply.
But all this does not mean that the market is in a state of protracted price decline. It is useful to remember two developments that have historically killed the bull market: the sharp and sudden rise in the Federal Reserve and recession.
The Fed, for now, seems to be out of the game of rising interest rates, so that is not the main factor.
That left a recession, the classic killer of the bull market. And therein lies the fault line. If you believe the recession is imminent and unavoidable, then income growth is likely to be very negative (double-digit decline) for several quarters and the market will likely see a double-digit price drop from the current level.
But if a recession can be avoided, it is very possible that the current fixed income environment will not mean much in the long run.
Stocks are sometimes wrong about income
One final point: The decline in the stock market does not always mean revenue is falling apart. A recent study by Ben Carlson on the blog "A Wealth of Common Sense" studied the S & P 500 in 87 years from 1930 to 2017. He found negative income in those 30 years (34 percent). If the stock market is the perfect forward indicator and the main driver is income, then you would expect the stock to fall in the previous year in those 30 years. But Carlson found that stocks dropped only in 12 of the 30 years before the decline in income. "So about 40 percent of the stock's time might signal future problems with income," Carlson concluded.
Carlson notes that many factors, including recession and high interest rates, are factors in the decline in profits, but the point is that the decline in stocks does not always signal an income recession.
The opposite is also true: Flat or negative income growth does not always predict a decline in stock prices.
This is the conclusion of Mark Haefele of UBS, who in a recent note to clients concluded that "while 'income recession' might be an interesting headline, investors need to make a difference between income breaks (which are quite attractive results for investors ) and a drop in income driven by an economic recession in which profits usually fell 20 percent. Based on the dominant evidence of the economy and company profits, the temporary break seems far more likely than the risk. "