Many media pundits like to skew numbers to fit their narrative and a lot of people out there believe the Wall Street storytelling that “”earnings excluding energy are fine”” and “”sales excluding currency are growing.””

Well we disagree. It's too bad that in the real world, many energy companies are nearing bankruptcy and multinational corporations have to deal with currency fluctuations. Therefore, investors can't simply ignore all the bad news and go about life hunky dory. The ugly truth is that S&P reported earnings have declined for 5 consecutive quarters and are in a full blown earnings recession.

Here are the S&P 500 reported earnings (trailing 12 months):

  S&P 500 EPS (TTM) % change
3/31/16 est $92.69 -7%
12/31/15 $89.27 -13%
9/30/15 $90.66 -14%
6/30/15 $94.91 -8%
3/31/15 $99.25 -2%
Source: Standard & Poor's

The earnings recession is showing no signs of letting up in 2016 and revisions continue to be in the wrong direction. The biggest issue is that energy estimates are still ridiculously optimistic and have to be ratcheted down. Analysts are forecasting earnings from the S&P energy sector of $6.96 for 2016 vs a loss of $10.14 in 2015. Considering that crude oil is currently trading more than 10% below last year's levels, these estimates are way off base unless there is a massive reversal in the price of crude.

The risks are also rising in the financial sector. In the most recent quarterly conference calls, major banks are all increasing their reserves for bad loans in the energy sector. Goldman Sachs believes that 40% of all its oil and gas loans or $4.2 billion are to junk rated firms. According to various reports, Citigroup has $57 billion in oil and gas exposure, Bank of America $43.8 billion and JP Morgan Chase $42 billion. This is a serious problem to the financial health of the banking sector.

We still believe that investors are unlikely to pay more for declining earnings and margins. Weakening earnings will continue to put a ceiling on the potential upside for the S&P 500 and could trigger a more meaningful correction in 2016.

“Stock Market Crash In The Saatchi Gallery, Chelsea – London.” by Jim Linwood is licensed under CC BY 2.0