Could This Earnings Recession Signal 1987-Style Market Crash?

As earnings go, so goes the market. That’s the way things are supposed to work, anyway. Except that right now, they clearly don’t.


Jim Bianco, president of Bianco Research argues that even [current tepid earnings forecasts] might be overly optimistic. In a research note to clients Monday, he pointed to data that shows that companies have been consistently cutting their estimates for future earnings as the close of the quarter in question nears.

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Meanwhile, over the past 18 months where earnings have fallen steadily, the SPDR S&P 500 ETF Trust (NYSE:SPY) has risen 7.4%. That’s a serious disconnect that’s worth investigating.

Bianco also draws parallels between today’s energy markets and those of nearly 30 years ago:

The argument can be made that corporate profits fell in 1986/1987 because a collapse in crude oil prices crushed energy profits. This is similar to the current fall in profits…

Despite this collapse in profits in 1986/1987, stock prices marched to new all-time highs. The same is happening now. However, by the fall of 1987 the market became overvalued by most measures and crashed, reversing all the gains over the previous 18 months.

Could we be in for another major market crash before the year is out? Hey, anything is possible.

One thing is for sure, though: this isn’t 1987. Nearly 30 years later, our modern markets bear little resemblance to those of the Reagan administration. Zero-percent interest rates, central banks flooding markets with liquidity, a true global economy, and much larger and more refined public markets are just some of the major differences between now and then.

We’ve also seen these kinds of warnings from analysts before. The post-financial-crisis recovery has had scores of doubters ready to pounce on any correction to say “I told you so.” So far, the bears have been horribly wrong.

So as we wrote recently, be very careful who you listen to about the markets.

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