Earnings Plummet Almost -50% During a Bear Market
The Relationship Between Earnings and Bear Markets
The following table lists the major bear markets in the United States going back to the 1920s (a major bear market here is defined as one where the S&P 500 Index fell more than -25%).
Corporate earnings tend to fall a lot during a bear market. Below the average drop in corporate earnings was -45.71%, a significant drop.
These time periods can have a dramatic effect upon retiree investment accounts. It can take a number of years for investments portfolios to return to pre bear market levels.
The table below illustrates that a recover in the S&P 500 Index, during these seven bear markets, took between 0.8 years and 13.3 years; on average 4.72 years. So basically one can expect that the S&P 500 Index might take almost 5 years to recover from a bear market.
Also illustrated is the breakeven for corporate earnings, where the average time to recover is 5.48 years.
There are a few caveats anytime you try to use financial theory to explain what could happen in the markets.
It’s true that the price of an asset should reflect the present value of all future cash flows but investors often over- or under-react based on their expectations of the future, meaning the pendulum can swing far above and below fundamental values.
Late in a bull market stock market valuations tend to swing way above the average, and when the eventual reset happens during the bear market this highly valued situation can result in a dramatic drop in stock market values as valuations reset.
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DEFINITIONS
EPS – Earnings per share (EPS) is a figure describing a public company’s profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company’s quarterly or annual net income and dividing by the number of its shares of stock outstanding.
S&P 500 Index - The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90. The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ). The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most followed equity indices, and many consider it one of the best representations of the U.S. stock market.
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