I don’t typically make predictions, but…
The S&P 500 Earnings Per Share (EPS) metric has seen significant fluctuations over the years, reflecting periods of growth, periods of modest growth, slowdowns, and more severe recession-induced downturns. Over the past three and a half decades, EPS growth has been largely positive, driven by corporate expansion, technological advances, and economic growth. However, several downturns have periodically interrupted this trend, some being triggered by economic recessions, financial crises, or global events.
- The late 1980s and early 1990s brought modest growth that accelerated into the late 1990s, which led into the dot-com bubble burst in the early 2000s. EPS took several years to recover, with growth only stabilizing in the mid-2000s. Then in 2008 the financial crisis caused one of the steepest EPS declines in recent history. It took approximately four years for quarterly earnings to fully recover to pre-crisis levels, with growth resuming in 2011.
- The most recent significant downturn occurred during the COVID-19 pandemic in 2020. Lockdowns and economic disruptions led to a sharp decline in corporate earnings; however, the rebound this time was faster than in previous crises due to the fact that the slowdown was self-induced and supported by unprecedented monetary and fiscal policy interventions. EPS levels returned to their pre-pandemic highs in less than two years, demonstrating the power of the U.S. economic engine.
Historically, it’s taken the S&P 500 four to five years for quarterly EPS to recover from previous peak levels following significant downturns.
However, this recovery time varies, depending on the nature and severity of the downturn, as well as the economic conditions and policy responses that follow. Despite these cycles, long-term EPS growth has been positive, with historical growth rates averaging over 6% per year, which in turn has contributed to strong stock market performance.
This trend of economic growth underlines the importance of staying focused on the long-term benefits of riding the wave of growth.
Market prediction:
- That the companies that make up the Standard & Poor’s 500 will be generating more profit in the future than they do today. No one knows the path that the earnings will take in the short run, but in years from now earnings will be substantially higher than they have ever been.
Bonus Prediction:
- I’ll add a second prediction, I am 100% certain that the path will NOT be smooth.
Why do I make this prediction and why is it important?
- Because the media will promote some short-term prediction, and most of the time it will be inaccurate, often wildly inaccurate.
- Understand that short-term predictions are pretty much useless.
- The medium to long-term future is bright, and
- Recognize that while EPS is growing (in a very lumpy way) it typically won’t feel good along the way.
Understanding the hard truths might help make enduring the lumpy times ahead just a bit easier.
-Paul R. Rossi, CFA
P.S. Ignore anyone that claims they can predict the short-term.