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Callum Thomas

ChartBrief #15 US Earnings Outlook

Here's a chart I find particularly interesting. As Q3 earnings season kicks off this month a question on many investors' minds is whether the US earnings recession is over. The chart below shows the ECRI Weekly Leading Index vs the year-on-year change in S&P 500 forward earnings. It seems whenever the ECRI WLI turns up it has flagged the end of earnings downturns e.g. 1992, 2002, 2009.

So I don't see anything obvious that would make me think this time is any different. In terms of drivers of an earnings recovery you only need to look at the factors that caused the slump in earnings i.e. strong US dollar & commodity collapse, both of which have become less of an issue - and then notice sectors like energy and materials starting to recover (IT and consumer staple are also seeing earnings outlook improvement). So unless we get blind-sided by a surprise recession, US corporate earnings look set to recover. This is very important for the market outlook, particularly in an environment where many are stressing over the level of absolute valuations - a recovery in earnings will most likely fix the overvaluation argument...

Bottom line: US corporate earnings look set to recover in the coming quarters.

This chart appeared in the "Weekly Macro Themes" publication from Topdown Charts Institutional - please let us know if you would like a trial.

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