What Happens When Corporate Earnings Fall?

Michael E. Schroer, CFA


A long-term perspective on the market suggests that a decline in corporate earnings does not necessarily mean muted growth for stocks this year.

Although corporate earnings estimates for S&P 500 companies still stand above projected 2022 levels, 2023 estimates have been trimmed in recent months. Even so, rising interest rates and cost pressures, along with fears of a possible recession, are resulting in some projections of a drop in earnings for 2023. If that happens, what would be the impact on stock prices?

It is important to point out that declines in overall corporate earnings are not unusual. The chart below illustrates the rolling 12-month change in earnings for the S&P 500® Index from 1955 through the present. In roughly 30% of the periods, earnings have been below the level of 12 months prior. 

S&P 500 Earnings Change
Rolling 12-Month Periods

Data from 1/1/1955–11/30/2022
Source: Bloomberg

What happened to stock prices during those periods when earnings declined? The illustrations below represent the range of price changes for the S&P 500 during 12-month periods when earnings declined (left) and when they rose (right). 

S&P 500 Price Changes

Data from 1/1/1955–11/30/2022
Source: Bloomberg

In comparison, stocks do tend to do better when earnings rise, but not by much. The median return (50th percentile) of S&P 500 price changes during periods of rising earnings was 10.6%, while the median return was 8.3% during periods of decline. Negative returns occurred more frequently during periods of falling earnings than rising earnings (35.1% compared to 23.4%) but, again, the difference was not tremendously significant (most of the time, stock prices still rose even when earnings fell).

This is not to say that a decline in S&P 500 earnings this year should be welcomed by investors, but a long-term look at history suggests that a decline in earnings wouldn’t necessarily eliminate the possibility of stock market gains in 2023.

Past performance is not a guarantee of future results.


This Market Update reflects the thoughts of Renaissance as of December 15, 2022. This information has been provided by Renaissance Investment Management. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision, nor should it be considered a recommendation. The views and opinions expressed are those of the Chief Investment Officer at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.


If Renaissance or benchmark performance is shown, it represents historically achieved results, and is no guarantee of future performance. Future investments may be made under materially different economic conditions, in different securities, and using different investment strategies and these differences may have a significant effect on the results portrayed. Each of these material market or economic conditions may or may not be repeated. Therefore, there may be sharp differences between the benchmark or Renaissance performance shown and the actual performance results achieved by any particular client. Benchmark results are shown for comparison purposes only. The benchmark presented represents unmanaged portfolios whose characteristics differ from the composite portfolios; however, they tend to represent the investment environment existing during the time periods shown. The benchmark cannot be invested in directly. The returns of the benchmark do not include any transaction costs, management fees, or other costs. The holdings of the client portfolios in our composites may differ significantly from the securities that comprise the benchmark shown. The benchmark has been selected to represent what Renaissance believes is an appropriate benchmark with which to compare the composite performance.


The value of an investment may fall as well as rise. Please note that different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Investor principal is not guaranteed and investors may not receive the full amount of their investment at the time of sale if asset values have fallen. No assurance can be given that an investor will not lose invested capital. Consultants supplied with these performance results are advised to use this data in accordance with SEC guidelines. The actual performance achieved by a client portfolio may be affected by a variety of factors, including the initial balance of the account, the timing and amount of any additions to or withdrawals from the portfolio, changes made to the account to reflect the specific investment needs or preferences of the client, durations and timing of participation as a RIM client, and a client portfolio’s risk tolerance, investment objectives, and investment time horizon. All investments carry a certain degree of risk, including the loss of principal, and are not guaranteed by the U.S. government.


(Indices are unmanaged and are not available for direct investment.)
S&P 500 Index—The S&P 500 Stock Index is a market capitalization weighted index and consists of 500 stocks chosen for market size, liquidity, and industry group representation.


S&P Dow Jones is the source and owner of the trademarks, service marks, and copyrights related to the S&P Indexes. S&P® is a trademark of S&P Dow Jones. This presentation may contain proprietary S&P data, and unauthorized use, disclosure, copying, dissemination, or redistribution is strictly prohibited. This is a presentation of Renaissance Investment Management. S&P Dow Jones is not responsible for the formatting or configuration of this material or for any inaccuracy in Renaissance’s presentation thereof. This data is to be used for the recipient’s internal use only.


Michael E. Schroer, CFA


PUBLISHED: January 20th, 2023
4 Min Read

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