Income recession looms – WSJ

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 related to the poor performance of the stock market.

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 Friday’s figures, economists surveyed by the Federal Reserve Bank of Philadelphia forecast that real gross domestic product will grow at a 2.4% annualized rate for the last three quarters of this year, a decent but still modest rate. a big step down from last year, when it increased 5.5. % each 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 with Covid-19 the fear has eased, Consumption is moving away from a variety of pandemics and back services, such as dining, are not represented on the stock exchange.

Meanwhile, the economic outlook in many countries where US multinationals generate sales is even worse. Russia Invades Ukraine are weighing heavily on the economies of many European countries. Big slowdown in China, where Beijing zero tolerance strategy to control Covid-19 has severely distorted growth rates, which are causing ripples 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 the beginning of the year through the end of 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.

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