Earnings growth is slowing after an extended period of very strong growth. The slowdown in earnings is likely to increase anxiety about investing in stocks and add to recession fears. An earnings slowdown often results in relative as well as absolute changes that could influence investor sector preferences.
It was inevitable that earnings growth would slow from its very strong pace in recent years. Now that the slowdown is upon us, many will undoubtedly cite the slowdown in earnings growth as evidence that a recession is at hand. While the past is no guarantee of the future, historic data suggest that earnings slowdowns and even contractions occur without recession. During such periods, market gains and multiple-expansion often occur. Having fueled earnings growth over the past few years, a decline in energy earnings is now leading the slowdown. A forecasted decline in energy earnings in 2007 accompanied by forecasts for growth in eight of ten S&P 500 sectors suggests not only an absolute change in earnings, but a shift in relative earnings as well. Slower growth in the economy and earnings suggests that investors may hold earnings quality and revenue growth more dearly and might more closely scrutinize relatively expensive debt markets.
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It was inevitable that earnings growth would slow from its very strong pace in recent years. Now that the slowdown is upon us, many will undoubtedly cite the slowdown in earnings growth as evidence that a recession is at hand. While the past is no guarantee of the future, historic data suggest that earnings slowdowns and even contractions occur without recession. During such periods, market gains and multiple-expansion often occur. Having fueled earnings growth over the past few years, a decline in energy earnings is now leading the slowdown. A forecasted decline in energy earnings in 2007 accompanied by forecasts for growth in eight of ten S&P 500 sectors suggests not only an absolute change in earnings, but a shift in relative earnings as well. Slower growth in the economy and earnings suggests that investors may hold earnings quality and revenue growth more dearly and might more closely scrutinize relatively expensive debt markets.
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