Story Highlights

  • Earnings for companies in the S&P 500 Index dropped 0.3% in the first quarter of 2019.
  • We are in an earnings recession without an economic recession.
  • One statistic shows that stocks climb after an earnings recession in a strong economy.
  • Use this strategy to capitalize on the next rally.

Here’s a word you are going to hear a lot: recession.

The definition of a recession is negative growth that lasts for two quarters.

Negative growth in one quarter here and there is fine. Two quarters, or half of the year, shows sustained weakness in the data and may be the start of a trend.

We are in a recession right now, but it’s not an economic recession.

An unusual recession is underway. And it’s going to be stealing headlines in the coming weeks.

I’m talking about an earnings recession.

These headlines are going to seem dire.

It’s not surprising — after all, an economic recession is worrisome. An earnings recession, however, isn’t always as bad as those headlines will sound.

When we look at our current situation, this earnings recession may be a bullish indicator for the stock market.

This one statistic tells us what to expect in this earnings recession. And we want to profit from that.

Corporate Earnings Recession … Not an Economic Recession

Watch my video below to learn more about the earnings recession.

To be clear, this is not an economic recession. An economic recession is a very bad sign for the economy. It shows a significant decline in economic activity and has a negative impact on the stock market as well.

We are talking about a corporate earnings recession.

Earnings for the S&P 500 Index declined 0.3% in the first quarter of the year. Second-quarter earnings are showing an expected decline of 2.6%, according to FactSet.

If this plays out, we’ll be in the middle of an earnings recession.

This still sounds like a bad omen for the markets, but there is a bright spot to focus on.

And that’s the fact that we are not seeing an economic recession now.

An earnings recession without an economic recession is rare.

It’s occurred four times in the past: 1974 to 1986, 1998, 2012 and 2016.

As you can see in the chart below:

The blue line is the S&P 500 price movement. The orange line represents the earnings for companies in the S&P 500. It notes the earnings recession. And the gray-shaded area represents an economic recession.

We’re in the middle of another earnings recession. As the economy continues to show strength, this year could be the fifth time this dynamic occurs.

Whenever we’ve seen this recession dynamic play out, it’s shown to be bullish for the stock market — even years after the earnings recession passed.

This bull market will come to an end. They all do.

But it’s not going to be because of the current earnings recession.

And there’s one statistic that tells us that the stock market will continue to climb higher. This is how you want to position your portfolio for now.

This Statistic Says Stocks Will Continue to Rise

The stock market is always looking forward. That’s why we don’t see the earnings recession leading to a steep drop in stock prices.

If the economy remains strong, the weak corporate earnings environment is passing by. A rising economy will help boost the bottom lines of companies and continue to lift the stock market.

Stocks climb after an earnings recession without an economic recession. That’s a simple statistic that many disregard. And why we’ll see worrisome headlines in the months ahead.

It tells us that the second half of the year is going to lead to stocks climbing higher, despite having started the year off with two negative-growth quarters for corporations.

I’ll be playing this directly through options related to earnings. But I don’t gamble before an earnings announcement.

Instead, I use cleared trading signals we can capitalize on. A few corporations give them after earnings. You can click here to learn more.

The bottom line is: Don’t panic, despite the negative headlines you are going to see about an earnings recession. You know that if the economy stays strong, an earnings recession is a bullish sign.

And stay tuned. Next week, I’ll be talking about why I am going against the status quo and predicting that the Federal Reserve Bank won’t cut rates this year.

Don’t worry; it’s great news for the stock market.


Chad Shoop, CMT

Editor, Automatic Profits Alert

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