I must sound like a broken record – going on about global corporate earnings again.

But that’s because it’s so important. . .

Earning sets the tone for investors.

For instance – if the market expects earnings to grow – it gives investors a bullish bias. (And vice versa).

Many know I’ve written a few times about the high probability that there’s going to be a global earnings recession in 2019 (most recently here).

Remember – an earnings recession is defined as two consecutive quarters of year-over-year declines or flat growth.

When I first wrote about this in summer 2018 – the market completely discounted it. And since then – earnings have collapsed suddenly and sharply.

And while the mainstream financial media can’t deny the drop in global earnings for Q1 2019 – marking the first negative quarter in nearly three years – most analysts believe it will be a singular event.

Meaning: after a weak Q1, the crowd expects the rest of 2019 and 2020 to see high earnings growth.

Why?

Because many expect China’s economy to rebound on the back of their government’s aggressive January stimulus (although I’m doubtful). An end to U.S. – China trade tensions (also doubtful). And a ‘higher-than-expected’ outlook for the U.S. economy (again -doubtful).

Just take a look at the S&P 500 Quarterly Earnings Per Share (EPS) Estimates for the next five quarters after Q1/2019. . .

This sharp increase in earnings estimates helps boost equity prices today. Because investors are buying now under the assumption earnings will increase over the rest of the year (and 2020).

Ed Keon – the chief investment strategist of QMA – summarized it perfectly.

“… The second, third and fourth quarter will show a rebound [in earnings]. That’s supportive of higher equity prices…”

Now – of course – there’s a possibility earnings outperform (especially because of the Federal Reserve’s recent dovish stance – effectively ending their tightening program for the immediate future).

But I don’t think it’s as likely as many believe. . .

For starters – the market is expecting a huge jump in earnings later this year.

To give you some perspective – S&P 500 earnings year-over-year (YoY) are expected to sink -2.2% in Q1/19 before returning to positive growth for both Q2 and Q3. Then later rebounding to 9% in Q4/19.

That’s a big increase.

And one that I see very unlikely (especially for Financials with the inverted/flat yield curve).

There are many reasons for this. I’ve written about collapsing global trade – read more here. And major indicators signaling trouble for corporate profits (especially the South Korean Export Growth Indicator aka SKEG) – read more here.

But – to summarize – the momentum for earnings is still downwards.

Making matters bleaker – historical trends indicate that when crowd estimates believe a “big jump” in earnings growth is four quarters away (as shown in the chart above) – earnings tend to fall across the next four quarters combined. . .

Maybe I’m wrong. But the market’s pricing things in very ‘frothy’ right now.

I still see earnings growth coming in weaker than many expect. Which will dampen equity prices.

Until anything changes (specifically with the Fed) – that’s my position.

Stay tuned.