• Moreover, it's worth remembering the stock market tends to bottom well before a recession is over, as shown in Figure 2.

Figure 2. S&P 500 Performance During Recessions (1945-2007)

Source: Bespoke Investment Group

• Likewise, historically the unemployment rate tends to continue increasing well after equities have already bottomed (see Figure 3).

Figure 3. Stocks Tend To Bottom Well Before The Unemployment Rate Peaks

Gray shading represents recessions

Source: StockVal, SunTrust Robinson Humphrey

III. Earnings

• The unofficial kickoff to 3Q08 earnings season begins on Tuesday. According to Thomson Reuters, the Street is expecting S&P 500 earnings to be down 4.8%. As shown in Figure 4, a significant portion of the decline can be attributed to write-offs in the financial sector. However, due to the slowing world economy and stronger U.S. dollar, we are starting to see estimates revised down across all ten S&P sectors (see two right-most columns in table), especially in some of the more globally exposed sectors areas, such as Energy, Materials, and Industrials.

Figure 4. Q3 S&P Sector Earning Estimates Are Being Revised Lower

Source: Thomson Baseline, SunTrust Robinson Humphrey

• Notably, both reported and operating earnings growth for the S&P 500 have already come down quite a bit from recent peaks, which is part of the sequencing process that typically occurs around recessions (see Figure 5).

Figure 5. S&P 500 Earnings Have Already Been Coming

Gray shading represents recessions

Source: StockVal, SunTrust Robinson Humphrey

• Similar to economic data, the decline in earnings around recessions typically lasts longer than the decline in stock prices. As shown in Figure 6, historically earnings on the S&P 500 have continued to fall, on average, five to six months after stocks have already bottomed (source: Factset). This implies that P/E ratios tend to increase at a market low as the stock market anticipates an economic and earnings recovery.

Figure 6. Stocks Typically Trough Well Before Earnings

Source: Factset, SunTrust Robinson Humphrey

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