Market Commentary

April 2014


The Weakest Earnings Cycle in 55 years

This has been the weakest earnings cycle in 55 years. Every earnings cycle
over the past 55 years has generated about a 7% annualized earnings per
share (EPS) growth rate, when measured from peak to peak or from trough
to trough. The best multi-year earnings cycle measured from prior peak
to the next peak was an annualized 9.1% and the worst 5.6%, with most
clustered tightly around the average of 7.3% [Figure 1]. This is notable given
the differing levels of inflation, interest rates, and economic growth that
companies had to adapt to in each cycle. However, the current cycle — while
not yet over — has been much weaker than the average, generating only a
2.8% annualized growth rate from the prior cycle peak in the second quarter
of 2007 through the first quarter of 2014.

Most prior earnings cycles had already climbed 50 – 70% above their prior
peak at this point in the cycle. However, the current cycle has only exceeded
the prior peak by about 20%, which can be attributed to two factors:


  • ƒFirst, the trough in earnings was much deeper, magnified by the severity of the recession. Financial companies wrote off many years of gains in just a few quarters. ƒ
  • Second, the momentum of the earnings recovery over the past few years has been subpar — tracing a much flatter line than in prior cycles.



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