Should we be concerned about “peak earnings growth”?
Author: Jonathan Lo
May 9, 2018
A more volatile environment in 2018 has resulted in a “standoff” between bulls and bears, with the markets having recently traded in an increasingly tight range. If you believe the chart, we’re approaching a critical moment where this may be resolved either to the upside or downside.
Source: Bloomberg
Bears might increasingly point to “peak earnings growth” on the market as a reason to get cautious. Indeed, we have noticed several notes on the topic of peak earnings growth recently – with earnings growing at a 20%+ year-over-year rate, sell-side estimates from the current earnings season imply that S&P 500 EPS growth would hit a peak in the second half of this year.
We would point out, though, that peak earnings growth has seldom resulted in the end of a bull market. In fact, since the 1950’s, S&P 500 performance has been at approximate average levels (8.1%) in the year following earnings growth peaks, and returns were positive nearly 70% of the time.
S&P 500 Trailing One-Year EPS Growth Peaks and Subsequent Performance
| S&P 500 Subsequent Holding Period Performance | |||||
|---|---|---|---|---|---|
| Peak EPS Growth Date | Peak EPS Growth Rate | 3 Months | 6 Months | 12 Months | Recession? |
| 2/29/1956 | 34.8% | 0.3% | 4.8% | -4.6% | No |
| 3/31/1960 | 20.8% | 2.9% | -3.3% | 17.6% | Yes |
| 7/31/1962 | 24.3% | -2.9% | 13.7% | 18.7% | No |
| 10/31/1965 | 16.9% | 0.5% | -1.5% | -13.2% | No |
| 10/31/1968 | 10.3% | -0.4% | 0.3% | -6.0% | No |
| 2/28/1974 | 31.3% | -9.3% | -25.0% | -15.2% | Yes |
| 12/31/1976 | 26.5% | -8.4% | -6.5% | -11.5% | No |
| 10/31/1979 | 32.5% | 12.1% | 4.4% | 25.2% | Yes |
| 8/31/1982 | 18.7% | 15.9% | 23.9% | 37.6% | No |
| 1/31/1985 | 33.5% | 0.1% | 6.3% | 17.9% | No |
| 9/30/1988 | 52.3% | 2.1% | 8.4% | 28.4% | No |
| 5/31/1993 | 23.4% | 3.0% | 2.6% | 1.4% | No |
| 4/30/1995 | 46.2% | 9.2% | 13.0% | 27.1% | No |
| 11/30/1997 | 15.7% | 9.8% | 14.2% | 21.8% | No |
| 8/31/2000 | 16.4% | -13.4% | -18.3% | -25.3% | Yes |
| 7/31/2004 | 26.0% | 2.6% | 7.2% | 12.0% | No |
| 9/30/2006 | 17.8% | 6.2% | 6.4% | 14.3% | No |
| 11/30/2010 | 71.0% | 12.4% | 13.9% | 5.6% | No |
| 10/31/2014 | 9.1% | -1.1% | 3.3% | 3.0% | No |
| Average | 27.8% | 2.2% | 3.6% | 8.1% | |
| Positive % | 63.2% | 73.7% | 68.4% | ||
| Non-recession Average | 25.5% | 3.2% | 7.3% | 10.2% | |
| Non-recession Positive % | 66.7% | 86.7% | 73.3% | ||
Source: BMO Capital Markets, as of May 2018
Although consensus estimates indicate earnings growth may peak around the fourth quarter of this year, the market is expected to continue to deliver double-digit earnings growth for the forseeable future. Moreover, the recent robust earnings growth has meant the forward multiple on the S&P 500 has come back to more attractive levels – on calendar year 2019 EPS estimates, the S&P 500 is now trading at 15.4x.
Finally, it is also important to acknowledge that the boost in earnings growth this year has been in part attributable to U.S. tax reform and the corresponding lowering of the corporate tax rate. As that is a one-time event, basing effects inevitably mean that subsequent periods will likely see lower earnings growth. However, top line growth (currently at 8.5% for the S&P 500) remains robust and indicative of the continuation of a strong economic environment for corporations.
Source: Stretegas Research, April 2018
Commentaries contained herein are provided as a general source of information based on information available as of May 7, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2018 AGF Management Limited. All rights reserved.
Written by
Jonathan Lo, MBA
Vice President, Portfolio Specialist Group
AGF Investments Inc.
