With reports at the halfway point, safe to say a feared earnings recession has been dodged

Traders work at the New York Stock Exchange.
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We're at the half-way mark for first quarter earnings. With 261 companies reporting in the , earnings are up 0.7% on a blended rate, according to Refinitiv.

"We have avoided an earnings recession — it is unlikely we will see two quarters with earnings down," David Aurelio, who tracks earnings for Refinitiv, told me.

Analysts began cutting estimates in late December on fears of a global slowdown led by China. They continued cutting in January and into the end of March. By the early part of April, earnings were expected to be down 2.5% for the first quarter, a big reversal from early December, when the same first quarter earnings were expected to be up nearly 7%.

But then a funny thing happened: Early reporters like Adobe and Nike reported much better than expected earnings.

What changed? Nick Raich from The Earnings Scout said the global growth narrative changed, due mostly to central banks. "First, the Fed backed off," Raich told me. "Then everyone realized that China was stabilizing, Europe was not as bad as feared, the U.S. economy was still strong, and the analysts had cut their numbers too much."

"The big story for earnings this year is, it's a lot better than feared," he added.

Big surprises

Because analysts cut earnings estimates too drastically, companies are beating estimates by far greater amounts than normal. Average earnings surprises are 6.9% above consensus, twice the normal percentage beat, according to Refinitiv. "You have to go back to 2009 to find these kinds of beat rates," Raich said.

Analysts have modestly trimmed second-quarter earnings, now expected to be up 1.7%, and Q3 up 2.0%. Fourth quarter estimates of 8.5% growth have been left largely unchanged.

As of now, 2019 will likely see modest mid-single digit gains in earnings, well below 2018 torrid earnings growth of above 20 percent, but still respectable.

The big problem for the markets now is valuation. Stocks are pricey, trading at around 17.1 times forward earnings, well above the historic average of 15 to 16 times forward earnings. Even if you take 2020 earnings estimates, the S&P 500 is trading at a roughly 15.5 multiple, near the historic average.

Bottom line: A lot of things are going to have to go right in the global economy to justify these prices. There is very little room for error.