The US may be headed for an earnings recession+, but compared to the rest of the world, profits remain exceptionally robust.
That was one message from SocGen’s Andrew Lapthorne, who on Monday noted that while earnings growth estimates for this year may look subdued, that’s more “a function of mean reversion following 2022 downgrades” than it is analysts factoring in a downturn, let alone an outright recession.
Thanks to what Lapthorne aptly described as “an extraordinary surge” following the drop seen in and around the original pandemic lockdowns, earnings in the US are now completely untethered.
Note that the trend in the US was already far steeper than that seen globally, a manifestation, no doubt, of both American corporate exceptionalism, buybacks and relatedly, shareholder capitalism taken to its (il)logical extreme.
What’s behind the resilience? Well, part of it is elevated sales or, more to the point, pricing power. “US companies seem to be benefiting more from inflation than in Europe,” Lapthorne went on, citing very high sales growth over the past three years in the US versus the pre-pandemic average and also compared to Europe.
If US companies are indeed benefiting from inflation, and the Fed needs to cool that very same inflation, the read-through of this conjuncture is straightforward. Or at least if you ask SocGen’s quants.
Robust US corporate profitability may be “incompatible” with a Fed pause. As Lapthorne put it, “a logical conclusion is that… for the Fed to pivot or indeed be successful, US corporates need to be far less profitable.”
It certainly took little time or encouragement for US firms to take their share of the consumer Covid stimulus money. US companies haven’t had this much pricing power in a long time. Some of the benefits were absorbed by producer and commodity input price increases, but on the whole producers of final goods and services have been making out quite well. It does seem, however that the bell is starting to toll. The next six months will be interesting.