As the aftershocks of the subprime-lending crisis rumble on, executives understandably find it difficult to read the conflicting US economic and business indicators they rely on to make strategic choices. Some are encouraged by sharp interest rate cuts, fiscal help, and export growth resulting from the dollar’s weakness, hoping that these will save the US economy from a prolonged recession. Others observe that although corporate earnings were considerably lower in the fourth quarter of 2007 than they were in the same period a year earlier, earnings forecasts from consensus analysts point to a rebound later this year, with overall US 2008 earnings growth expected to grow by more than 10 percent.

Investors, executives, and boards might therefore be tempted to face the rest of 2008 cautiously, but not to feel any need to develop radical contingency plans for a substantial and sustained reduction in earnings. Yet giving in to that temptation would be a mistake because such plans will probably be needed. A study of historic trends shows that corporate earnings might well retreat by as much as 40 percent from their 2007 levels.

Few companies as yet anticipate such a blow to their earnings and general economic health. Fewer...