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So far 90% of S&P 500 companies have reported earnings in the US. For the third quarter of 2019, these companies have seen their earnings decline –2.3% year-over-year. This marks the third straight quarter of earnings decline. It could be called an earnings recession, though unlike economic recessions the National Bureau of Economic Research (NBER) does not call earnings recessions. Looking back at the fall of 2018, remember the great market swoon that saw the S&P 500 fall nearly –20% from tip to trough? Many blamed it on the Fed, many blamed it on trade policy. But there was some real grit behind that quick price drop. Forward corporate earnings did not just decelerate in 2019, their growth has been negative.

2018 was a sugar high. Tax cuts delivered great returns to US corporations that year. It is easy to have higher earnings year-over-year (YOY) when taxes, which are a negative to earnings, have been cut significantly. In 2019, the year after the sugar high, companies have had a difficult time keeping up the momentum of earnings acceleration that characterized 2018. According to Wall Street analysts, 2020 is looking likely to be a good year with corporate earnings reaccelerating from easier comparable rates in 2019.

The unanswered question though is whether or not future corporate earnings will be as high as is currently being predicted. Tight labor markets and rising wages are good for the economy in general. We all want to get paid more. But rising wages also mean a squeeze on corporate profits. When labor’s share of the income increases, corporate margins decrease. When corporate margins decrease corporate earning growth decelerates.

So as with everything, good news in one area often comes with bad news in another area. We must choose what we find more beneficial.