I don’t like the phrase “something’s gotta give.” It’s overused even as clichés go.
Just about the only thing more immediately exhausting than “something’s gotta give” is “it is what it is,” a totally nebulous tautology masquerading as introspection and inexplicably accepted as such in everyday conversation.
That said, we’ve entered “something’s gotta give” territory when it comes to an onerous macro environment, optimistic profit forecasts and investors attempting to reconcile the unreconcilable.
My own warnings on the outlook for Q2 and Q3 corporate profits date to Q1, but I started getting more vocal about things on May 22, when I “calmly” asked if US corporate profits were “about to plunge.” Since then, I’ve taken to table-pounding which will either make me look like a Chicken Little or make bottom-up consensus look like starry-eyed Pollyannas.
Read more: Pollyannas Vs Chicken Littles: The Great American Profit Debate
I should emphasize that I’m not cherry-picking when it comes to this discussion. This debate is ubiquitous headed into reporting season in the US. You couldn’t escape it if you tried.
The figure (below, from Goldman) shows the breakdown of S&P returns by year since 2017.
So far, consensus is sticking with the idea that earnings will hang tough, come hell or high recession.
In yet another example of a popular analyst (or at least he’s popular in some circles) cautioning on the market’s “something’s gotta give” moment, SocGen’s Andrew Lapthorne observed that globally, “there are as many upgrades as there are downgrades.”
That, at a time when big banks are starting to call for recessions in every major developed economy.
“If a slowdown/recession is indeed on the way, then today’s earnings forecasts are way too optimistic,” Lapthorne went on to say, in a new note.
The figure on the left (above) gives you a sense of things, indexed to the beginning of this year.
While it’s certainly true that valuation expansion has contributed heavily to stock gains in the era of ZIRP, NIRP, LSAP and forward guidance, profits still matter. As the figure on the right (above) shows, prices and profits don’t decouple for long.
Lapthorne presented the situation as binary. “There have only been a limited number of downgrades so far,” he said. “This surely must change during the upcoming reporting season, otherwise we assume that both demand and price increases are holding up and central banks would need to continue hiking.”
It is what it is.
It’ll be interesting to see how the tech sector do within a recessionary environment…
Totally disagree with you on you “it is what it is” take.
Agreeing that you are fundamentally correct, it is still useful to stop assigning/deflecting blame at some point to merely agree that we are where we are.
I use the phrase ‘yet here we are’ professionally and frequently, simply to short circuit the circuitous reason finding and reset us toward solution finding.
This made me think of Jeremy Irons’ line in Margin Call… “…BUT, that is spilt milk under the bridge.”
It is what it is. This is phatic communication. You sometimes just overthink things. So, how’s it going?
It’s truly incredible that instead of discussing corporate profits, readers chose to debate my disdain for clichés and imprecise language.
H, I appreciate your attention to detail and the careful thought you put into your writing. I am also not a fan of cliches. The one I loathe most is “everything happens for a reason.” I am currently shopping for a house and I have been musing at the disconnect between buyers reality at six percent interest rates on mortgages and sellers delusion that they can still get all-time-high prices at double the mortgage rate that existed three months ago. Like corporate earnings, I think sellers picture of buyers reality is too rosy. I can’t remember if it was you or a NYT article I recently read, but it argued that humans are not rational animals, but rationalizing animals. Eventually reality is going to catch up to the still over-valued sectors of the market or to use another cliche, the chicken littles will come home to roost.
Ah well, I’m one of the good readers that wanted to discuss corporate profits… but I liked the margin call reference from Prestwick and ladyofshalott just taught me about “phatic communication”. Top comments! 🙂
Hell is other people (Sartre).