Poised for an Earnings Recession
Nearly half of S&P 500 constituents will report first quarter earnings over the next two weeks. If consensus expectations are correct, they’ll show that company profits are declining for a second straight quarter. Back-to-back EPS declines would signal the first ‘earnings recession’ since 2020, when COVID lockdowns brought the global economy to a grinding halt.
Since that time, corporate profits have risen at a pace that far exceeds the average annual EPS growth rate of 7%. Estimates for 12-month forward earnings are more than 60% higher than their 2020 lows.
Stimulus-fueled demand and record profit margins were largely to thank for that rise – but now those tailwinds have faded.
Revenues in the first quarter are expected to rise only 2% according to FactSet, substantially less than the annual rate of inflation. Profit margins are contracting, too, from last year’s elevated rate of 12.2%, to more modest 11.2%. Taken together, that points to an EPS decline of 6.5%. You rarely see that kind of drop outside of economic recessions.
Fortunately, actual earnings usually exceed expectations. In most years, consensus estimates trough in the weeks ahead of the reporting season, then hook higher as companies beat lowered expectations.Continue reading “Mid-Month Market Update: April 2023”