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5 months ago
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Is This As Good As It Gets?

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The peak earnings narrative has garnered significant attention this earnings season—in part because of a comment by Caterpillar’s management stating that the first quarter may have been the “high-water mark” for the year. First quarter earnings growth of 26% may be as good as it gets this cycle as cost pressures have started to build and comparisons get tougher in 2019 after the anniversary of the tax law passes. But, does that mean a recession is looming?

We don’t think so. LPL Research Chief Investment Strategist John Lynch notes, “Slower earnings growth after such a strong first quarter is almost certainly in the cards, but history shows that peak earnings growth does not necessarily mean that a recession is right around the corner. In fact, history suggests a recession may still be about four years away.” The numbers in our LPL Chart of the Day below, which lists the last 12 earnings growth peaks going back more than 60 years, illustrate this point. Should this relationship hold, we could expect a recession in mid-2022; that would make the current U.S. economic expansion—at 13 years—the longest ever.

As a result, we are not overly concerned about an earnings growth peak and expect solid growth to continue, albeit at a slower pace. Assuming the economic expansion continues well into 2019 as we expect, while benefits from the new tax law (e.g., capital spending incentives and buybacks) are still cycling through, S&P 500 Index earnings-per-share growth in 2019 may reach, or potentially even exceed its long-term average of 7–8%. Look for more on this relationship and a recap of first quarter earnings season in today’s Weekly Market Commentary, due out later today.

IMPORTANT DISCLOSURES

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

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5 months ago
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