There are pervasive, and increasingly pronounced, signs that U.S. equities will be in a profit recession before the end of this year. Target Corp.’s warning on margins yesterday is emblematic of the problems faced by firms in an inflationary regime. Even if an economy-wide recession is avoided, the backdrop for equities is set to get worse before it gets better.
Inevitably — given the unequivocal message from leading indicators earlier this year — the emphasis in the market debate has shifted from inflation to growth. Higher rates and tighter liquidity have a more immediate effect on growth, and, while inflation has yet to conclusively peak, growth is beginning to show the cracks you’d expect in the face of a Fed on the warpath.
U.S. large-cap earnings have been resilient this year, but here too there are worrying signs that seem set to worsen. One of those is sentiment. The Conference Board’s CEO Confidence Index has fallen sharply this year. This typically leads to weaker profit growth in the next three-to-six months. Furthermore, analysts are revising down their estimates, something that often precedes weaker earnings growth.
