Those of a bearish persuasion have waited six months (at least) for concrete evidence to support the contention that US corporate profits, bedeviled as they should be by gale-force margin headwinds, are destined for some manner of reckoning.

Such calls grew louder in the lead up to Q2 earnings, and were quite shrill by the time Q3 reporting season rolled around. Although cracks emerged in last quarter’s results, some of America’s corporate heavyweights defied dire predictions.

“Ironically, it was inflation which contributed to corporate earnings growth for those who had pricing power,” Nomura’s Charlie McElligott said this week. For those companies, inflation was a tailwind.

But, with Americans’ savings buffers dwindling and rates on revolving credit balances poised to reach record highs, the days of leaning on consumers to protect corporate bottom lines are probably numbered, particularly amid mounting evidence of decelerating economic activity.

It’s against that backdrop that Q4 earnings season kicks off in the week ahead. Three quarters of S&P 500 market cap is set to report between now and February 10.

Consensus expects aggregate, index-level profit growth to flatline. 0% EPS growth for Q4 would represent a marked deceleration from the 12% clip seen just three quarters ago. At this point, an earnings recession is the consensus view.

As you can imagine given the macro environment, the sector-level breakdown is diverse. Consensus expects EPS growth of better than 60% for the Energy sector, for example, on more than 350bps of margin expansion versus last year. Excluding energy, S&P 500 earnings should shrink by 5% YoY.

By contrast, consensus expects Tech and Comms Services earnings to contract by 9% and 22%, respectively, on massive margin compression. If the expected 475bps hit to Comms Services margins is realized, profitability in the sector would be the lowest in more than seven years.

At the index level, top-line growth is expected to be 8% thanks to hot nominal growth and the dollar’s sharp pullback. Recall that the greenback’s inexorable ascent during prior quarters crimped revenues for some of America’s most recognizable multinationals.

Remember: 2022’s bear market was almost solely about multiple compression in the face of higher rates and tighter monetary policy. The de-rating story is mostly in the rearview. Now, it’s a matter of how deep any profit recession will be, and how much margin compression investors should expect.

If you ask Goldman, earnings growth will be flat for the year, and profit margins will fall by 50bps to pre-pandemic levels. “Recent client conversations indicate some skeptical investors are wary that managements might low-ball Q4 results and 2023 guidance,” the bank’s David Kostin remarked.

“More than 20% of S&P 500 market cap has pre-announced, the highest share since Q1 2020,” Kostin added, in a Friday note. “The three-month trend of S&P 500 FY2 EPS revision sentiment stands at -31%, the most negative reading outside of the 2008 and 2020 recessions.”