Are We Heading for a Profit Recession?

Chief Investment Strategist

As we enter deeper into first-quarter earnings season, we will likely soon find out whether aggregate earnings growth on the S&P 500 Index is heading for its first back-to-back quarterly contraction since September 2012. What makes the earnings slowdown more of a paradox is that dividend growth on the S&P continues to advance at a double-digit pace.1 Markets discount a tremendous amount of information, but ultimately, stock markets trade at a multiple of these two essential sources of income. So what are we to conclude when corporate earnings head south yet aggregate dividends continue to head north? The bull case is that, should a profit contraction occur, it’s unlikely to be more than a two-quarter affair. This view, which I subscribe to, argues that the frigid weather that sent snowbound consumers into hibernation this winter will soon thaw. The velocity of the foreign exchange hit to U.S. multinationals will moderate, and managements will adjust to a stronger dollar. And while energy companies may have to adapt to oil prices being lower for longer than many expected, this is merely a transfer of wealth from multinational corporations and the Organization of Petroleum Exporting Countries (OPEC) to the American consumer and other sectors of the U.S. economy, where higher savings rates and lower energy costs will become potential drivers of future gross domestic product (GDP) growth. The spring season we have entered is an important one, not just for the direction of corporate profits but for the direction of aggregate corporate dividend growth. Some of the largest dividend-paying companies in the country, including Apple, Exxon, Chevron, Johnson & Johnson and Wells Fargo, typically declare and raise their annual dividend payments by the end of the June quarter2. On balance, I believe they will continue to this year, even if some of them have to borrow to do so. Earnings growth, like GDP growth, can be choppy. And although dividend growth should not be viewed as a leading indicator, it at least reflects executive judgments about the cash-generating capacity of these enterprises beyond the next few quarters. What executives say via their dividend policies gives us a window into what they foresee for the rest of the year. On the other hand, come July 1, if it becomes evident that aggregate dividend growth in the U.S. has fallen below the long-term average of 5.5%, that would, I believe, be reason enough to become more cautious about the direction of U.S. stocks.         1Source: “Another Quarter, Another Record,” Barron’s, 3/30/15. 2As of 3/30/15, the WisdomTree Dividend Index held 3.02% of Apple; 2,75% of Exxon; 2.01% of Chevron; 1.81% of Johnson & Johnson and 1.76% of Wells Fargo.

Important Risks Related to this Article

Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
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About the Contributor
Chief Investment Strategist
Luciano Siracusano is WisdomTree’s Chief Investment Strategist. He is the co-creator, with CEO Jonathan Steinberg, of WisdomTree’s patented Indexing methodology. Mr. Siracusano led WisdomTree’s sales organization from October 2008 until June of 2015, while also serving as the firm’s Chief Investment Strategist. Luciano stepped down as WisdomTree’s Head of Sales in 2015 to focus full time on his duties as Chief Investment Strategist. From 2001 until October 2008, Luciano was WisdomTree’s Director of Research and was responsible for the creation and development of WisdomTree’s proprietary stock indexes. Luciano is a regular guest on CNBC and FOX Business, and speaks and writes frequently on ETFs, indexing and global financial markets. A former equity analyst at Value Line, Luciano began his career as a speechwriter for former New York Governor Mario Cuomo and HUD Secretary Henry Cisneros. He graduated from Columbia University with a B.A. in Political Science in 1987.