Halfway through earnings season, it looks like we are going to dodge the feared profit recession

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Half way through the earnings season, we've seen few surprises, but the market seems increasingly dependent on interest rate cuts.

Goldman Sachs reflected this view today: They cut their 2019 earnings estimate for the S&P 500 to 3% growth, from a prior estimate of 3%-6% growth.That is a great comfort to bulls, who were fearful of a cascade of downward earnings revisions from multinational companies under assault by trade wars and slower global growth would lead to a dramatic earnings "recession."

However, while there is no earnings collapse, the trade wars and slower global growth are clearly having an impact. More than half of companies with significant revenue exposure overseas are seeing declines in earnings growth, but companies with more domestic oriented focus that get the majority of revenues inside the United States are seeing modest increases in earnings:<50% of sales outside U.S. up 6.

What makes it easier for the bulls to stay bullish are the direction of interest rates. The markets are becoming more dependent on the belief that dovish central banks will provide a backstop to slower global growth — and they do have history on their side. In a recent note, DataTrek noted that earnings for 2014 to 2016 were essentially flat, but the S&P was up 28% during that period, thanks to lower long-term interest rates.

Bulls are again assuming that the global central bank backstop will keep the global economy out of a recession. But that is an assumption, not a fact of history: it's not clear that global central bank magic will always work. If not, and the global growth picture does not improve, earnings guidance will come down dramatically.

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