BMO Isn’t Buying into the Earnings Recession Argument


Jul. 31 2019, Updated 6:34 p.m. ET

BMO on the earnings recession

BMO Capital Markets has a year-end target of 3,000 for the S&P 500 (SPY). BMO’s equity strategist, Brian Belski, doesn’t think that an earnings recession is happening. An “earnings recession” is defined as at least two consecutive quarters of corporate earnings decline.

As reported by Bloomberg, Belski thinks that the earnings recession fears are “overblown.” He thinks that the earnings machine that has been powering the record ten-year bull market will continue. Belski acknowledged that analysts are too optimistic regarding their estimates. He said that even after applying past revision patterns to the estimates, an earnings recession isn’t in sight.

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Recession fears are overblown

Belski said the forecasted earnings decline in the first quarter “has raised the fear quotient among investors with many now anticipating an earnings recession.” He said, “From our lens, we remain constructive on earnings growth for 2019 and believe these lowered expectations could be setting up for a noticeable positive surprise.”

Slowdown concerns

While a recession might not be around the corner, investors’ concerns regarding a slowdown aren’t baseless. As we discussed in What Fund Managers’ Allocations Say about the Market Outlook, fund managers are cautious on the stock market (DIA) (IVV) despite its YTD (year-to-date) rally. Another example of the cautious behavior can be found in fund managers’ sector allocations. Investors are typically long on defensive sectors like REITs, utilities (XLU), and healthcare (XLV). Investors are usually short on stocks in general and industrials (XLI) in particular.


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