Palisade Research - Wed, Oct 3, 2018

I Now See An 85% Chance of a Global Earnings Recession by Late 2019

image of a businessman standing back to us, with his hands on his waist, looking at various stock and data charts

If many of you forgot - I made a bold prediction (or rather a bet) that there will be a global corporate earnings recession by late-summer 2019.

As with every hypothesis - I start off with a base assumption of 50-50. Either there will be an earnings recession or there won't be.

Using Bayes Theorem - a very powerful and simple statistical formula for determining conditional probability - I could build a theory from new and other information.

"Conditional probability is the probability of one event occurring with some relationship to one or more other events. . ."

This provided me with a way to revise my existing hypothesis and chance value given all new incoming data.

If more news came out adding to my earnings recession hypothesis - I would increase the chance-value percentage accordingly. And if news came out against my hypothesis - I would decrease it.

So, what's my chance-value at today?

Well, over the last few months - the data and incoming evidence has only made me drastically increase my assumptions of an earnings crisis.

I now believe there's an 85% chance there will be a global earnings recession by late-summer 2019.

Let's review everything together. . .

It all started back in April 2018 when one of my favorite leading-indicators signaled a coming crisis for corporations worldwide.

I'm talking about the South Korean Export Growth Indicator (or what I call SKEG). . .

What's a 'leading-indicator'? Basically, it's an economic variable that changes before the rest of the economy begins to go in a particular direction.

And many wouldn't realize it - but South Korean exports are a very accurate way of measuring growth or a crash in global corporate earnings (EPS - earnings per share).

For instance - over the last 25 years, the direction of the SKEG has almost perfectly preceded global EPS with a 12-month lag.

So, in early 2018 when the SKEG suddenly crashed negative - it alarmed me (you can read our first article detailing this here).

Make sure to take a look for yourself. . .

line chart of South Korean Export Growth, since 1993

Such a sharp and sudden drop - historically - isn't good news.

I decided to study this - because like many 'leading-indicators' - I didn't simply take it verbatim.

I instead started monitoring the other factors and variables that would also affect global corporate earnings.

First - I researched and then wrote about the deceleration of world trade volumes (click here to read). And then I wrote about the dollar shortage crisis - and Federal Reserve tightening - which is making a mess of the Emerging Markets and corporate balance sheets (read here). Not too mention the deepening trade-war between the U.S. and China affecting hundreds-of-billions in sales.

This all affects corporations worldwide. . .

Slowly I started realizing that the SKEG indicator was going to prove right again. All incoming evidence was pointing towards it.

That's why when I saw the following data earlier this week - I had to raise my global earnings recession chance-value to 85%.

For starters - the percentage of companies in the S&P 500 that issued negative earnings guidance has soared.

It's all the way up to 75% - that's three-fourths of companies. . .

bar chart of S&P 500 Earnings Expectations, since Q4 2013

S&P 500 Growing Negative Earnings Expectations

These companies are expecting weaker earnings - meaning less income. That's never a good sign.

Next - you can see the last time SKEG was sharply negative was mid-2014. And this lasted until mid-2016 - two years later.

bar and line chart of MSCI World forward EPS and South Korea exports year over year, since 2010

This is during the same period that the Federal Reserve ended Quantitative Easing (money printing). And began talking about raising rates - kicking off a tightening cycle.

This caused the U.S. Dollar Index to soar over 25% - clearly affecting global earnings. . .

area chart of DXY USD Index, since 2008

Yet once the U.S. dollar started weakening in early 2017, both the SKEG and global earnings turned increasingly positive (see both charts above).

But now that the US dollar's quickly strengthening again - the SKEG's sharply back into negative areas. . .

Taking all this into consideration - plus all the previous evidence I've detailed (make sure to read the hyperlinks above). I believe there's now a very high chance that global earnings will collapse by summer-end 2019.

That's why contrary to the mainstream boasting about worldwide growth - an earnings recession is only months away.

As new relevant information comes out - I will update my hypothesis.

But as of today - my calculations show there's an 85% (maybe even higher) chance that by summer 2019 there will be a collapse in global corporate earnings.

So - don't say you weren't warned. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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