"You Are Here"... And It Is A Scary Place

Technically, the third quarter earnings season is not exactly over: 2% of companies are still left to report. Untechnically, it is, and with 98% of S&P500 companies now in the history books, 74% of the companies in the index have reported earnings above the mean estimate but 45% of the companies have reported sales above the mean estimate.

But while gaming analyst estimates is the oldest trick in the book (and even so more than half of companies are failing to beat on sales), a truly dire picture is revealed when one steps back and looks at the data in historical basis.

That is precisely what Ellington Management did recently in their note looking at the last stretch of the junk bubble. This is what they said.

Corporations are now running out of steam in terms of their ability to generate earnings. As of Q2 2015, the year-over-year change in annual corporate earnings dropped to -$8.21 per share for the S&P 500 and to -$4.79 per share for the Russell 2000. The previous three times this metric fell that far into negative territory on the S&P 500 were Q1 1990, Q1 2001, and Q4 2007, coinciding with the start of each of the last three high yield default cycles. According to a recent article in The Economist, in the most recent quarter less than half of S&P 500 companies recorded increasing profit year-over-year.

And here is Ellington's chart showing where "You" are right now.

And since it is not where you "are" that matters but where you "are headed", the place is very scary indeed.