Bear Markets, Earnings, and Recessions: What’s Priced in and How to Position Equity Allocations?

Written by: Jacob Johnston | Advisor Asset Management

Bear Markets

Bear markets are measured in price and time; how much did prices decline and how long did it last? By some definitions we are approaching what might be considered the “Average Bear.” For example, Ned Davis Research (NDR) data shows that since 1900 the average bear market in the Dow Jones Industrial Average is a 31.0% decline over 299 days. The current selloff in the benchmark currently sits at a 21% decline over 269 days (peak to trough, 1/3/22–9/30/22) or looking at the S&P 500 Index, a 25.43% decline over 282 days (peak to trough, 1/3/22–10/12/22).

Not all bear markets are created equal, and an important nuance when looking into past bear markets is the macroeconomic environment — more specifically, the difference in bear markets that coincided with a recession versus bear markets that were independent of a recession. As you might expect, bear markets that coincide with a recession tend to be more severe in both price and time, with the average “recessionary bear” drawdown of 35% over 353 days.

a history of bear markets: DJIA 1900-present

If we compare the current drawdown to historical bear markets broken out by recession/non-recession, we can infer the equity market has yet to fully price in a recession.

Bear Market — Dow Jones Industrial Average   


  Time (Days)  

All Bear Markets



Non-Recessionary Bears



Recessionary Bears



Current Bear*



Source: AAM, Ned Davis Research data | *As of 1/3/2022–9/30/2022 | Past performance is not indicative of future results.


Consensus estimates for the S&P 500 compiled by Bloomberg are calling for 2022 earnings per share (EPS) growth of 6.23% and an additional 6.26% in 2023.

S&P 500 Consensus Earnings Estimates — Bloomberg





$ 208.12



$ 221.08



$ 234.92


Source: AAM, Bloomberg data | As of 10/17/2022 | Past performance is not indicative of future results.

2023 estimates have fallen 8% from the June peak due to downward revisions coming from every sector except for Energy. The average decline in EPS for the S&P 500 during a recession is around 30%, with no formal recession ever avoiding a significant hit.

S&P 500 CY 2022 & CY 2023 Bottom-up EPS: 1-year

Source: FactSet | Past performance is not indicative of future results.

The trend is lower, but there is still a long way to go for a recession to be fully reflected in earnings estimates — even though the probability of a recession is rising.

Recession Probabilities

Central banks are aggressively trying to destroy demand to cool inflation without tipping the economy into a recession. This is a difficult, if not impossible, balancing act. The probability of a recession in the United States has been steadily rising all year and currently sits at 60%, according to Bloomberg. We see similar trends from the New York Fed Probability of Recession in the Next-12-Months model.

new york fed probability of recession in the next 12 months

 Source: Strategas

The yield curve is flashing warning signs with short-maturity interest rates exceeding long-maturity rates. This is measured by the spread between the yields on 10-year and 2-year U.S. Treasuries and is typically associated with a recession in the near future as the curve has inverted before each economic recession since 1970.

painful combination: hawkish fed plus recession risk is fueling curve inversion trend

Source: Bloomberg

The curve first inverted in April 2022 before steepening back into positive territory. It inverted again in July, with the current spread at a cycle low -53bps (basis points). While the equity market and earnings estimates are holding out hope the economy does not tip into a recession, the yield curve is indicating a “soft landing” is unlikely.

Outlook and Positioning

Equity markets are ultimately a function of earnings and interest rates. We find ourselves in a scenario where profits are decelerating, and the Fed is tightening financial conditions. This typically results in below average returns and above average probabilities of loss (volatility). Therefore, within equity allocations we believe it prudent to focus on high-quality stocks with durable earnings and income generation as the best way to preserve capital, reduce volatility, and earn a predictable source of return.

Dividend-paying equities become more attractive as recession probabilities rise. The chart below shows the relative performance of S&P 500 dividend payers verse non-dividend payers in the 12-months prior and 12-months post a recession. The upward sloping line indicates dividend payers typically outperform non-dividend payers before, during, and after a recession, on average.

S&P 500 dividend payers/nonpayers ratio around start of recessions

Source: Ned Davis Research | Past performance is not indicative of future results.

There are companies that fit this profile in almost every sector, but we find areas in Energy, Industrials, Financials, and Healthcare particularly attractive. A point of emphasis at this stage is to be selective as we see significant dispersion in returns based on the profile of the underlying equity. Higher inflation and higher interest rates will surely slow the economy. Opportunity exists to focus on stocks and sectors better suited to this new economic backdrop, so if a recession is ultimately priced into the broad equity markets, it is not fully priced into your portfolio.

Related: Midterm Elections Are Bullish Even In A Bear Market