An earnings recession plagues investors’ minds as reporting season approaches
There may not be a recession yet, but there is certainly an earnings recession. The March jobs report, at 236,000, only a tad below consensus, was a relief for stocks. Futures, which closed at 9:15 a.m. ET, ended up slightly. It was the only piece of economic news that fit with the “Goldilocks” economy that stocks have come to depend upon: A slowdown in the economy, but not so much of a slowdown that a serious recession ensues. In a flat week for the S & P 500, there were signs that a belief in that Goldilocks economy was getting harder to support. The ISM Manufacturing PMI, the JOLTS data, factory orders, the ADP employment report and the ISM services PMI were all weaker than expected — and were all met with initial declines. In stocks, Caterpillar was down 9%, along with many other economically sensitive cyclical stocks. Caterpillar is now below its 200-day moving average for the first time since the market bottom in October. Homebuilders (XHB) were down over 5%. CAT 5D mountain CAT fell last week Tech stocks, which led the market only a short while ago, are also showing weakness. Semiconductors (SMH) were down 4% last week, with Nvidia, the best performing tech stock this year, also down 4% since the start of the month. Regional banks again began trading at the low end of their recent trading range. The regional bank ETF (KRE) closed at a new low on Wednesday. Even American Express was down 5%, weighing on the Dow. Only rallies in defensive health care, consumer staples and utilities helped support the market. What Treasury yields are saying Treasury yields resumed falling last week in response to the weaker data. Initially seen as a simple flight-to-safety move following the banking crisis, the decline in yields now largely viewed as a worry about a recession, which would be bearish for stocks. Data from the Federal reserve showing a big drop in commercial bank lending also reinforced that banks would likely be very cautious in their commentary when earnings season begins this Friday. As a general rule, falling earnings for banks, particularly due to a drop in commercial lending, is not viewed as a positive for the markets. Earnings season Speaking of earnings, first-quarter earnings season starts this week, with earnings for the S & P 500 expected to decline 5.2%, according to Refinitiv. That is on top of a Q4 2022 decline of 3.2%. The Q2 2023 expectations are not optimistic either: A decline of 4% That would be three consecutive quarters of negative earnings growth. That’s an earnings recession. You have to go back to Q1-Q3 of 2020 to see three consecutive quarters of earnings decline. As he often does, Julian Emanuel from Evercore ISI neatly encapsulated the problem for corporate profits: “Margin contraction personified as labor costs remaining firm meet waning pricing power.” So what is the market telling us? Cyclicals are rolling over. Defensive stocks have stopped rallying. Bank lending looks weak. Treasury yields declining signaling concerns over economic weakness. The rally in tech, based on the idea that the Fed is indeed near the end of its hiking cycle and will likely cut rates by the end of the year, has halted for the moment. Put it all together, and you can’t help but think the eagerness to declare the bear market over is a bit premature. As Emanuel noted over the weekend: “No Bear Market has ever ended before the recession started.”
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