Timing the bottom of bear markets

05 September 2022

By Dorothée Deck, London UK, Cross Asset Strategist; Julien Lafargue, London UK, Chief Market Strategist

Key points

  • After an equity sell-off in the first half of the year, is history on the side of those who believe the recent recovery in global equities has more legs? 
  • We believe that global earnings will be broadly flat this year. However, after a decent set of quarterly results, analysts’ earnings forecasts still look too rosy
  • Since 1966, and on average, the S&P 500 has hit rock bottom five months before the trough in the ISM Manufacturing index, and 12 months before that in both trailing and forward earnings estimates
  • Markets are likely to remain highly volatile until more clarity emerges on the growth and inflation outlook. While earnings downgrades may be on the way, a full reset in them is not needed for markets to improve sustainably

After a dire start to the year for investors, equity markets have seen a significant rebound. Having bottomed out in June, is history on the side of those that believe the recovery in global equities has more legs?

As the second quarter’s earnings season comes to an end, we remain of the view that expectations for this year and possibly next need to come down. This is often pointed to as a reason why equity markets haven’t bottomed yet. However, history suggests that investors don’t need to wait for the last earnings downgrades to see stocks rebounding.

Earnings drama avoided

Companies in the S&P 500 have delivered close to 14% revenue, and 10% earnings, growth in the second quarter, according to Refinitiv. At face value, this looks impressive, given the weakening economic growth and stubbornly elevated inflation at the time. However, focusing on these headline figures can mislead. The energy sector contributed much to overall earnings growth, thanks to soaring oil and gas prices. Excluding energy, earnings growth for the S&P 500 was slightly negative in the second quarter.

The story is broadly similar in Europe. However, with close to half of companies reporting earnings on a bi-annual basis and several currencies to account for, interpreting numbers is always more challenging in the region.

With many base effects from last year still at play and companies and consumers still finding their footing after the COVID-19 pandemic, it’s hard to judge whether this earnings season was good or bad. Our initial take is that low expectations meant a drama was avoided, but the overall picture is one of deteriorating fundamentals.

Expectations still too rosy

As we have argued before, earnings forecasts look too optimistic and are likely to be downgraded later in the year, primarily driven by margins expectations.

Global earnings are still expected to rise by 11% in 2022 and by 6% in 2023, according to consensus forecasts by IBES. The comparable numbers in the US and Europe are +8% and +17% respectively in 2022, and +8% and +2% in 2023. Despite the worsening macro data, those estimates have actually risen in the past six months, mainly driven by the commodity sectors (energy and basic materials).

Business surveys already suggest much lower earnings in coming months (as shown by the ISM Manufacturing New Orders component1 and the US CEO Business Confidence Survey2). Our top-down earnings model is consistent with broadly flat global earnings growth in 2022.

Equity markets generally trough before activity and earnings

Some market commentators have argued that we won’t see a sustainable rebound in the equity market until earnings estimates are reset lower. We disagree for two reasons:

  1. On our numbers, the equity market is already discounting a 9% decline in global earnings in 2022
  2. We looked at the past nine equity bear markets in the US, going back to 1966, and found that equity markets generally trough several months ahead of economic activity and corporate earnings

The table shows that the S&P 500 has tended to bottom five months before a trough in the ISM Manufacturing index, on average, within a range of 22 months before and three months after the trough. Only on two occasions did the equity market hit its low after the ISM index did, those being in August 1982 and March 2009.


While we only have partial data for earnings, the message is generally the same. US equities have tended to trough 12 months ahead of both trailing and forward earnings, based on the past seven and five bear markets, respectively.

We conducted the same analysis in Europe, see next chart, and although the data is more mixed, it still shows that the equity market tends to trough before the trough in activity and earnings. 


Based on the past eight bear markets in Europe, since 1970, the MSCI European index usually bottomed a month before seen in the ISM Manufacturing index. Since 1987, it has troughed five months ahead of trailing earnings, on average, and in four times out of six it bottomed one or two months before forward earnings estimates.

Bear market recovery times vary significantly

In general, it took 13 months on average for US equities to form a bottom, 36% below the previous peak. It then took another 26 months for investors to recoup their losses, based on our analysis of American bear markets since 1966. Recovery times varied significantly, between three months and six years.

In terms of how long it took for markets to get back to their previous peak, there was no clear pattern (see chart). During those bear markets, trailing earnings typically declined by 16%, within a range of -9% to -31%. The ISM Manufacturing index dropped to 39.5 on average, within a range of 30.7 to 46.1.


In Europe, it took 12 months on average for the MSCI Europe to trough, 38% below the previous peak. Investors needed to wait longer than their US peers to recoup their losses, at 38 months from their trough on average. However, there was much variation, with the bear markets of 1975 and 2009 distorting the average. Trailing earnings typically declined by 24% during those bear markets, while the ISM bottomed at 39.8 on average.

Full reset in earnings expectations not needed for markets to rebound sustainably

US and European equity markets have rebounded by 13% and 8%, respectively, from their June and July lows. Until more clarity emerges on the growth and inflation outlook, markets are likely to remain highly volatile and dominated by headlines. While earnings estimates are likely to be downgraded materially in the coming weeks, we don’t believe a full reset is a necessary condition for markets to improve sustainably.

Related articles


Market Perspectives September 2022

Welcome to the latest edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank. With the Russia-Ukraine war raging on, inflation surging, and the risk of recession rearing its ugly head once again, financial markets are grappling with much uncertainty. This month’s report attempts to make sense of it all, providing insight and context behind the major trends at play.