An Earnings Recession Looms – WSJ

It’s too early to start worrying about a recession. Worrying about an earnings recession is another matter.

Economic recessions don’t happen often. Since 1948, only a dozen of them, according to the business cycle determination committee of the National Bureau of Economic Research (the accepted arbitrator for economic expansion and contraction activities). economy), and in recent decades they have become less frequent. This doesn’t mean the country won’t eventually experience another recession, but with the Federal Reserve just beginning to tighten policy, and with a strong job market and balance sheet, households are in good shape, that may not happen anytime soon.

Earnings recessions, generally defined as two consecutive quarters of a company’s profits below their year-to-date levels, occur much more frequently than economic downturns. According to the Commerce Department’s measure of after-tax profits, there have been 19 earnings recessions since 1948. Put those earnings numbers in real or adjusted for inflation and the number of revenue recessions. earnings increased to 22. It is not surprising that many of those earnings declines are linked to poor stock market performance.

Analysts say the second quarter will be a tough term for earnings, but the setback will be temporary. For companies in the S&P 500, they estimate second-quarter earnings per share to be 5.7% higher than at the start of the year, according to Refinitiv. That could put them down in inflation-adjusted terms. They then expect growth to rebound, with earnings rising 10.8% in the third quarter and 10.7% in the fourth.

But considering the environment in which components of the S&P 500 are operating, the earnings outlook could be much worse than analysts are predicting.

For starters, it’s a fact that the economy is slowing down from last year’s breakneck pace. In figures released Friday, economists surveyed by the Federal Reserve Bank of Philadelphia forecast that real gross domestic product will grow at a 2.4 percent annual rate over the last three quarters. this year, which is decent but still a big step down from last year, when it grew 5.5% quarter-on-quarter. That is essentially the same as saying that domestic sales of US companies will slow – a development combined with a tightening job market that is increasing the labor costs of companies that can put pressure on profit margins.

To sum things up, the composition of the US economy is changing. The pandemic has sent demand for commodities skyrocketing — a shift that has coincided with the strength of the stock market, as more companies in the S&P 500 are active in the manufacturing and selling of goods than in the stock market. economy in general. Companies like Netflix also benefit from consumers looking to homes. But now, as Covid-19 fears ease, consumption is shifting away from many pandemic categories and back into services, such as dining, which are underrepresented in the stock market. stock.

Meanwhile, the economic outlook in many countries where US multinationals generate sales is even worse. Russia’s invasion of Ukraine is weighing heavily on the economies of many European countries. The massive downturn in China, where Beijing’s zero-tolerance strategy to control Covid-19 has severely slowed growth, is having a ripple effect across Asia and beyond.

Furthermore, a stronger dollar could further erode the overseas earnings of American companies, as they translate into fewer dollars than they did in the past. Against the currencies of other advanced economies, the dollar rose 12.6% from a year earlier; it has fallen from year-to-date levels through 2021.

An earnings recession won’t be as bad as an actual recession, but for investors it won’t be much fun — especially if the Fed keeps raising rates. Until it becomes clear that earnings can actually start to rise again, the stock market may not be a happy place.

The last time inflation was this high, the Federal Reserve raised interest rates so much that the US fell into a recession. Will we see that repeat today? WSJ’s Dion Rabouin analyzes why the Fed’s next steps are so important. Photo: Kevin Dietsch / Getty Images

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