In the past seven quarters, we’ve been in an earnings recession. We did see some recovery in the third quarter of 2016. According to some market participants, we may see a rebound of earnings growth in the fourth quarter of 2016. In 2017, earnings growth is expected to accelerate.
When the subprime crisis impacted the markets in 2008, it triggered a huge fall in the index level (SPY) (VFINX). Liquidity became a major concern for the economy. To reverse this situation, the Fed lowered its key interest rates to near-zero levels. To stimulate the economy, it introduced its QE (quantitative easing) program in February 2009. QE ended in October 2014. Since that time, we’ve seen a gradual fall in earnings growth.
The trailing EPS (earnings per share) growth has fallen nearly 50.0% from its high in October 2014 until 2Q16. That indicates that the Fed’s monetary stimulus was mainly responsible for the movement of corporate earnings in the past years. Since the end of the QE program, earnings growth has been in a declining phase.
Next, let’s analyze how the pullback of QE affected earnings:
- less liquidity, so less investment impacting growth and earnings
- an appreciating dollar hurting export earnings
- a simultaneous decline in crude oil prices, which impacted energy sector earnings
Bob Greifeld’s view
According to Bob Greifeld, chief executive officer of Nasdaq, we may see a robust earnings growth in 2017. The optimistic view of the US economy (IWF) (IVV) (VOO) is bringing money to US markets. President-elect Donald Trump’s proposed corporate tax cut will increase shareholder value. It will also help corporations invest in new projects and increase existing capabilities. Some corporations are also expecting the demand outlook to improve, which will be a major driver of earnings growth.
In the next part of this series, we’ll look at Greifeld’s view on the technology sector.