Corporate Earnings Recession Could Plunge the Dow in 2020

  • U.S. stocks look poised to extend record highs this week.
  • Former Merrill Lynch strategist Richard Bernstein foresees a “full-blown profits recession” for U.S. companies.
  • Declining earnings could be a bad sign for the bull market.

The Dow and broader U.S. stock market are on track for new highs this week, but the rally could be in jeopardy as corporate earnings slide into a “full blown recession,” according to investor Richard Bernstein.

Although Bernstein isn’t sounding the alarm on equities just yet, he expects volatility to be a lot higher heading into next year. As we know, volatility and stocks are inversely related about 75% of the time.

S&P 500 Companies are in an Earnings Recession

American corporations are currently mired in their longest earnings recession since 2016. For the most recent quarter, S&P 500 companies saw their blended earnings decline 2.3% from a year earlier, according to FactSet, a financial research firm. Earnings have now declined in each of the last three quarters.

Although some companies cited the U.S.-China trade was as the biggest headwind, the impact of tariffs is perceived to be less than it was previously. Roughly a quarter of all earnings calls in the third quarter included the word “tariff.” This figure was 29% during the second quarter.

Foreign exchange rates are another common problem facing U.S. companies. Case in point: Costco reported that “weakening foreign currencies relative to the U.S. dollar negatively impacted sales by about 60 basis points…”

Earnings Expected to Weaken Further: Bernstein

In an interview with CNBC last week, Richard Bernstein said stock-market bulls are overlooking the fact that “earnings in the United States are still decelerating.” A continuation of this trend will eventually impact valuations despite the apparent rigging of earnings expectations that is running rampant on Wall Street.

Bernstein, who had a long stint as Merrill Lynch’s chief investment strategist…

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