Many know I’ve been calling for a global earnings recession since May 2018.
It all started when I saw a sharp collapse in the South Korean Export Growth Indicator – aka SKEG (a highly accurate, yet-barely-followed, metric).
I’ve written many times before on the importance of SKEG. But for those that need refreshing – here’s a summary.
SKEG is one of my favorite ‘leading indicators’ (basically an economic variable that changes before the rest of the economy begins to) for tracking global corporate earnings (EPS).
It’s been historically accurate over the last 25 years, and yet the mainstream hardly looks at it. But most importantly. South Korea publishes their data before most other countries – so we can get an early look at what to expect.
Thus – when the SKEG moves sharply – most usually global earnings (EPS) follows closely behind it. (Who would’ve guessed there’s a tight correlation between South Korean export growth and global earnings?)
For some perspective – over the last 25 years now, the direction of the SKEG has almost perfectly preceded global earnings within a 12-month lag. . .
Just look at the chart I published back in May 2018 when SKEG fell off a cliff (and since then, so have global corporate earnings). . .
This was an alarming drop – the largest since 2008 (and before that, the 2001 recession).
And because of this (plus more) – I’ve been expecting a global earnings recession sometime in late summer 2019.
So, how are things today – 10 months later?
Still very ugly.
South Korean exports are sinking lower – and with no rebound in sight. . .
What does this mean going forward for global earnings?
Well – it tells us that things are still looking grim.
For instance – just look at the percentage of S&P 500 companies expecting negative earnings this quarter. . .
This shows more than 80% – four-out-of-five – companies expect negative earnings.
But what’s really troubling is the decline in quarter-over-quarter (Q4/18 – Q1/19) earnings growth across all sectors in the S&P 500 (the blue bar represents Q1/2019). . .
These companies are seeing significant declines in their earnings – meaning less income. And that’s not a sign of a healthy economy.
Making matters worse – Goldman Sachs and both the Atlanta and New York Fed see Q1/2019 U.S. growth (GDP) coming in below 1%. . .
Furthermore – it’s reported that U.S. consumer spending (accounting for more than two-thirds of economic growth in the U.S.) dropped 0.5% in December. That’s the largest decline since 2009.
It looks as if President Trump’s corporate tax cuts (a fiscal stimulus) are finally wearing off. And without any Federal Reserve stimulus (via rate cuts and Quantitative Easing) or further fiscal stimulus, I don’t expect momentum to change.
The trend tells me that things are still – and will remain – in decline.
The SKEG indicator yet again proved accurate as we’ve seen global earnings deteriorate since the massive drop in summer 2018. And it still signals further downside.
All this is why I strongly believe there’s going to be a global earnings recession later this year.
As new information comes out – I’ll update my hypothesis. But as of now – I estimate there’s an 85% chance of this global earnings recession happening.
So tread lightly. . .
