Last summer, it became very clear that the corporate earnings growth was coming to an end (Read here, here, here, and here). And what followed was months of volatile ups and downs in the markets.

Unfortunately, the earnings story hasn’t gotten much better during this period. And even worse, the long-term outlook for earnings growth seems to be deteriorating. This is all bad news considering earnings are the most important drivers of stock prices.

Corporate profits tanked

While the markets were closed on Friday, the Bureau of Economic Analysis released data showing that corporate profits had plunged 11.5% year-over-year during the fourth quarter of 2015. Excluding some unusual items, the decline was still an ugly 7.6%.

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Much of the drop can be blamed on the unfavorable effects low prices on the energy sector and the strong dollar on the export-driven manufacturing sector. However, economists warn of much broader concerns.

“[I]t also likely reflects the beginnings of a profit margin squeeze driven by tighter labor markets, rising wages, and weak productivity growth,” JPMorgan’s Jesse Edgerton said in an email.

The inflection in profit margins, which remain at elevated levels, is an unsettling change.

"The link between profit margins and recessions is strong," Barclays' Jonathan Glionna said in an October note to clients. In other words, the deterioration in margins we're witnessing has historically been an indicator of an impending economic recession.



Edgerton estimates there is a 26% probability that the US economy goes into recession within 12 months.

We haven’t seen this since the financial crisis

The story isn’t much different when you consider only the biggest publicly traded firms. According to FactSet, earnings for the S&P 500 (^GSPC) fell 3.6% during the Q4 of 2015. And that negative number is not a one-quarter deal.

“For Q1 2016, the estimated earnings decline is -8.7%,” FactSet’s John Butters said. “If the index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.”

While earnings aren’t crashing like they were during the crisis, they nevertheless aren’t exhibiting the type of growth that stock market investors would be excited about.

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