Another corporate earnings season is upon investors, and it is a season of recession.
Corporate profits in the first quarter will be smaller than they were a year ago. It will mark the second consecutive quarter that company bottom lines have declined from a year earlier. If one were to apply the most common accepted definition of an economic recession — two straight quarters of contracting economic activity — then corporate earnings are in a recession.
Earnings by S&P 500 companies are forecast to shrink by 6.8 percent as firms begin reporting financial results in bulk during the week ahead. That would be the deepest drop since the second quarter of 2020. (Remember that quarter? COVID-19 was spreading, stay-at-home orders and fear gripped the economy and sent corporate profits into an immediate tailspin.)
The virus is not infecting profit growth now, though its residue remains spread across financial results in the form of higher costs (inflation), higher borrowing costs (higher interest rates to fight inflation) and flagging economic confidence (lower corporate investment).
The bottom-line earnings will get a lot of attention this week as companies like Johnson & Johnson, Tesla and Procter and Gamble release their financial results for the past three months. Investors also know to scrutinize the top line, too. Revenues are expected to grow by 1.8% for S&P 500 companies, according to market data firm FactSet. Growing revenues but shrinking profits means costs are rising.
This pinch between slowing sales and rising costs is important for shareholders and the economy. It will be especially prevalent among technology firms, materials companies and energy producers. Company executives will be quizzed about how they are addressing this squeeze during their quarterly conference calls. Their reactions will reverberate through to employees, consumers and the Federal Reserve.
The central bank itself is increasingly in a tight spot — between continuing to raise interest rates to bring down inflation and a slowing job market. An earnings recession doesn’t necessarily have to lead to an economic one, though.
