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:
- First, 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.
- Second, the momentum of the earnings recovery over the past few years has been subpar — tracing a much flatter line than in prior cycles.