Recession? Corporate America’s Earnings Say It’s Already Arrived

(Bloomberg) — As the US economy teeters on the brink of recession, Wall Street is already enduring what could turn out to be the most prolonged corporate profits downturn in seven years.

With the first-quarter earnings season drawing to a close, the profits of S&P 500 companies are estimated to have dropped 3.7% on average, compared to a year ago. While data compiled by Bloomberg Intelligence shows that 78% of firms surpassed forecasts, that’s less impressive than it sounds, given analysts had slashed their expectations before the season kicked off.

More crucially, it was the second straight quarter of earnings declines for corporate America. Bearish earnings forecasts now center around the April to June period, for which a 7.3% profit slump is penciled in, according to data compiled by Bloomberg Intelligence. And the pinch from higher interest rates and wilting consumer demand will extend into the third quarter of 2023, analysts reckon, backtracking on earlier predictions that earnings recovery would kick in around then.

That implies a longer profit recession than during the pandemic. An earnings drop of more than three quarters was last seen in 2015 to 2016, when the Federal Reserve started its last interest rate hiking cycle.

Unsurprising then that the S&P 500 index has posted no gains since major Wall Street lenders kicked off the earnings season in mid-April.

“Optimists would note that the worst analysts’ prognoses have not come true and large proportion of companies exceeded their targets in the first quarter,” said Marija Veitmane, senior multi-asset strategist for State Street Global Markets. “Pessimists would say earnings are declining, and future guidance is weak.”

Here are the key takeaways from the earnings season, and what to look for in coming quarters:

Margin Pressures

A slowing economy is exerting a toll on profit margins, which according to consensus forecasts won’t recover before the final quarter of 2023. PayPal Holdings Inc. was among companies warning recently that adjusted operating margins will not grow as quickly as anticipated. Tyson Foods Inc. was another that cut margin guidance.

“While first-quarter earnings appear strong, we do see cracks emerge where sales growth is outpacing earnings growth – a squeeze on corporate margins,” said Anneka Treon, a managing director at Van Lanschot Kempen.

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