Earnings Outlook: An earnings recession looms for first time in 3 years

The S&P 500 looks set to suffer its first earnings recession in three years, led by year-over-year declines in the materials and technology sectors. And early signs suggest the recession could continue for a third quarter.

The unofficial start of the second-quarter earnings reporting season will begin, and preliminary reports suggest the outlook keeps getting worse. The blended year-over-year growth estimate for earnings per share for the S&P 500 SPX, +0.34%  , which represents already reported results and the average analyst estimates of coming results, is negative 3.34% as of Friday, with six of 11 sectors estimated to post declines, according to data provided by FactSet.

Actual reports, however, have been much worse. With 24 of the 505 S&P 500 companies, or 4.75%, having already reported results, actual reported EPS is down 11.23% from a year ago.

Adding to the negative outlook, 114 S&P 500 companies issued EPS guidance through July 3, with 88 companies, or 77% of that total, providing guidance that was below the average estimate of analysts. That is well above the five-year average of 74 companies that warn of earnings misses, and the second most since FactSet began tracking data in 2006.

The only time the number was higher at that stage was in the first quarter of 2016, when 92 companies warned of earnings misses. Overall EPS fell 6.58% that quarter, FactSet said.

The negative outlook comes after a 0.29% EPS decline in the first quarter. An earnings “recession” is often defined as two straight quarters of declines.

The last time the S&P 500 suffered an earnings recession was the second quarter of 2016, when earnings declined for four straight quarters.

Don’t miss: Risk of earnings recession rises, as S&P 500 profits fall for first time in 3 years.

Among sectors, materials is set to be the worst earnings performer, with the blended growth estimate currently showing a negative 18.26%, FactSet said. The sector expected to grow EPS the most is health care, but the blended estimate is currently just 2.09%.

Earnings season will kick off on Monday, July 15, starting with Citigroup Inc. C, +0.29%  and J.B. Hunt Transport Services Inc. JBHT, +6.53%  Here are the blended second-quarter estimates for all 11 sectors through Wednesday, including what the estimates were as of March 31 and the actual reported results:

Sector Blended EPS growth estimate % Blended EPS growth % as of March 31 Number of companies reported Actual reported EPS growth %
S&P 500 -3.34 -0.32 24/505 -11.23
Communication services +1.37 +3.40 0 N/A
Consumer discretionary -3.42 +1.63 6 +3.90
Consumer staples -2.89 -0.59 7 -3.65
Energy -9.01 -4.36 0 N/A
Financials +0.41 +2.33 1 -8.21
Health care +2.09 +1.88 0 N/A
Industrials -1.84 +5.78 4 -1.90
Information technology -11.99 -9.69 6 -23.65
Materials -18.26 -3.26 0 N/A
Real Estate +1.03 +2.52 0 N/A
Utilities +1.18 +2.34 0 N/A
FactSet

Third-quarter earnings aren’t looking so good either. The blended growth estimate is currently negative 1.05%, down from an estimate of 1.19% growth as of March 31. A nice rebound is expected in the fourth quarter, as the 2019 EPS growth estimate is 2.35%, despite the declines seen for the first three quarters.

As MarketWatch contributor Mark Hulbert wrote last week, an earnings recession might not be as scary for investors as it sounds. But based on what happened during the last recession, investors may not enjoy the ride too much.

Also read: Opinion: This is one recession where stocks can actually make you money.

The S&P 500 started the last earnings recession with a 6.9% tumble during the third quarter of 2015, but rose the next three quarters for a total gain of 1.7% during the four-quarter streak of EPS declines.

And for the first quarter of 2019, when earnings declined 0.29%, the S&P 500 shot up 13.1%. During the second quarter, as the earnings recession is estimated to begin, the index gained 3.8%.

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