Sam Stovall: Expect a Slowdown, Not a Recession

The stock market took yet another pasting Monday, as investors quivered in fear over a Chinese growth-rate decrease, the Sino-American trade war, limping oil prices, woes in Europe and emerging nations—and an expected US earnings fall-off. Lurking behind the curtain, like a long-fanged movie monster, is the prospect of a recession.

Fear not, says Sam Stovall, chief investment strategist of US equity strategy at CFRA. What he calls an “EPS recession” always precedes an economic one. In an earnings recession, profits indeed slide, but you don’t get surges in unemployment and business failures, plus economic contraction, that you do in an economic recession.

Stovall doesn’t think the US will experience either kind. So don’t expect a bear market, let alone a recession, he says.

“We believe investors are premature in projecting the start of an EPS recession, and therefore an economic contraction,” he wrote in a Monday research note. Right now, from the October high, the S&P 500 is down almost 13% (in price terms, not including dividends).

Earnings are  usually the most important factor driving stocks, so the expectation that the roaring growth of earnings is subsiding has given a lot of investors the heebie-jeebies. It’s also interesting to note, from Stovall’s data, that there have been three post-World War II EPS recessions where no economic recession materialized. The last EPS recession began in 2015.

For the record, CFRA forecasts that S&P 500 EPS growth will decelerate from its third quarter 2018 peak of 28.6% to 5.2% in next year’s third period. From that point, earnings pick up to a 12% increase through 2020’s third quarter.