- Commodity crashes are typically associated with severe earnings contractions.
- Current expectations for flat calendar-year operating results seem overly optimistic in the present environment.
- A cautious outlook toward second-half earnings is advised.
Will collapsing commodity prices clobber U.S. earnings? In six out of seven cases since 1970, commodity crashes exceeding 20% year-over-year have corresponded with earnings contractions exceeding 10% year-over-year. The lone exception occurred in 1998 when earnings decelerated to zero growth without actually contracting.
Given this track record, a cautious outlook toward second-half earnings is advised. While it’s true that correlation is not causation, history has a funny way of repeating. The current consensus for flat calendar-year operating results seems overly optimistic in the present environment.