This article was added by the user . TheWorldNews is not responsible for the content of the platform.

Corporate America’s earnings say recession has already arrived

NEW YORK – 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 per cent on average, compared to a year ago. While data compiled by Bloomberg Intelligence shows that 78 per cent 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 per cent 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.

A slowing economy is exerting a toll on profit margins, which according to consensus forecasts won’t recover before the final quarter of 2023.

Morgan Stanley strategist Michael Wilson predicts “additional margin downside” over the coming months, with labor costs a major headwind and a softer economy crimping companies’ pricing power.

As more Americans fall behind on payments, the four biggest US banks saw bad consumer loan write-offs rise 73 per cent from year-ago levels.

“The fallout in smaller businesses as banks lending is greatly reduced could also show in financial markets as overall business activity slows, and also it should impact the consumer,” said Paul de la Baume, senior market strategist at FlowBank SA.

The problems could ripple into commercial real estate, according to Franklin Templeton Investments’ CEO Jenny Johnson, who noted that small banks account for 25 per cent of the lending to this sector.

Technology firms were a first-quarter bright spot, with Apple Inc., Meta Platforms Inc., Google-parent Alphabet Inc. and Inc. all beating expectations. They are also benefiting from signs the Federal Reserve has stopped hiking rates.

Still, sector earnings are expected to decline more than 7 per cent in the second quarter. What’s more, tech comprises 35 per cent of the S&P’s market-cap share, but just under 30 per cent of earnings, analysts at Bloomberg Intelligence note. They said tech, media and telecoms’ earnings growth is expected to lag the broader index until 2024, leaving shares vulnerable.

Artificial intelligence developments could prove key, having already powered rallies at Nvidia Corp., Microsoft Corp. and Alphabet. All three have raced to add AI features to their products, making them among the biggest contributors to this year’s S&P 500 gains.

Corporate share purchases have long been one of the biggest sources of support for Wall Street and for companies’ own earnings per share. Now they are waning as borrowing costs rise and cash reserves shrink.

S&P 500 constituents’ actual first-quarter buybacks were 21 per cent below year-ago levels, according to Goldman Sachs Group Inc. And upcoming quarters could see fewer share-buying announcements, Goldman says, predicting buybacks this year at US$808 billion, versus US$923 billion in 2022. BLOOMBERG