Checking In On The Earnings ‘Recession’

Corporate America is in an earnings recession. Or at least according to forecasted Q4 2019 profit growth for the S&P, which, headed into reporting season, was expected to decline for a second consecutive quarter.

To be sure, “earnings recession” makes for exciting headlines, but far more important than whether overall EPS growth does or doesn’t post a small contraction when the entirety of Q4 2019 results are in the books, is whether the expected “hockey stick” inflection pans out.

As a reminder, consensus is baking in a reacceleration later this year, despite ongoing headwinds to margins and rampant uncertainty around trade and politics, all of which are arguably holding back business investment.

All in all, things are going ok this reporting season, although corporate earnings news has been summarily relegated to sections below the proverbial fold thanks to the coronavirus.

Specifically, earnings beats are in line with the historical median of around 5%, although, as Morgan Stanley notes, that varies “quite a bit” by sector. Through the end of last week, Q4 earnings were up 0.7% with around three-quarters of results in.

“Over the last 4 months, S&P 500 Q1 2020 EPS estimates have been revised -4.9%”, Wells Fargo’s Chris Harvey notes, adding that for the full-year, projections for annual profit growth for the S&P 500 have been revised 3% lower.

(Wells Fargo)

Now that estimates have come down, Morgan Stanley’s Mike Wilson is a bit more comfortable with things, but not wholly at ease.

After citing the same hockey stick-style inflection illustrated in the first visual above (the red bars), Wilson notes that Q3 and Q4 estimates “assume substantial positive operating leverage”, something the bank is “skeptical of”.

(Morgan Stanley)

“The situation is worse on the small and mid cap side”, Wilson goes on to say, adding that in his view, it is “highly unlikely that these numbers will be achieved” and Morgan “would not be surprised if numbers for the first and second quarter are lowered in the near future”.

The overarching point here isn’t so much to throw cold water on anyone’s constructive outlook. Rather, a continual source of consternation for reasonable people is the expected sharp reacceleration in profit growth for corporate America at a time when there are still very good arguments to be made that pressure on margins will persist and political uncertainty will rise into the election (especially if, for whatever reason, it begins to look like a progressive Democrat has a real shot at wrenching the keys to the kingdom away from a president who would cut corporate taxes to zero if he could).

It’s all just more food for thought. Take it for what it’s worth, and remember: There’s still a demonstrable disconnect between C-suite sentiment and consumer confidence.

Read more: 97% Of CFOs Say US Economy Is Headed For Downturn, 77% Say Stocks Overvalued