Still waiting for a dramatic earnings decline, but what if it happened? Approaching 20% of the S & P 500 reporting, and so far companies are not slashing estimates. Third-quarter blended earnings for the S & P 500 are still at 3.0%, slightly higher than a few days earlier, while fourth-quarter estimates are at 4.7%, only slightly below the 5.8% expected on Oct. 1. The reason everyone is expecting an earnings apocalypse is that the Street is disappointed that inflation is not coming down fast enough, so everyone believes the Fed will continue to raise rates into 2023, which will result in an inevitable recession. Traders are well aware that recessions invariably result in a decline in earnings. How much earnings decline depends on the extent of the recession, but certainly 20%+ is normal, as DataTrek has noted: Earnings in economic downturns (S & P 500, peak to trough earnings) Q2 1989-Q4 1991 – 24.4% Q3 2000-Q4 2001 – 31.6% Q2 2007-Q3 2009 – 56.7% Q4 2019-Q4 2020 – 22.1% Source: DataTrek The takeaway: Earnings downturns of 20% or more are common in downturns, and, rarely, 50% (the Global Financial Crisis of 2008-2009 was a whopper). Two points: 1) earnings today have not only not fallen 20%, they aren’t even negative year over year, and 2) even if a decline did happen, earnings declines don’t last long. That is, they tend to bounce back quickly after a recession. That’s why the S & P 500 recovers. Declines of 20% or more in the S & P are fairly uncommon: the S & P 500 has declined 20% or more only 10 times since 1950. Truist co-chief investment officer Keith Lerner notes that of those 10 declines, in seven out of 10 the S & P was higher one year later, by an average of 15%. Bottom line: Not only is there no evidence of an imminent earnings armageddon, long-term investors shouldn’t be overly concerned even if there is one.