Has America Entered an Earnings Recession? What That Could Mean for Your Wallet
Written by
David Nadelle
Edited by
Ashley Almario
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As the second-quarter earnings season begins, analysts and investors are worried that an earnings recession may be imminent. However, many feel its already arrived and could test the economic resolve of companies and consumers throughout 2023.
See: Bank of America Says Stocks Are Headed for ‘Big Collapse’
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Going by the strict definition, U.S. companies are in the middle of an earnings recession, meaning profits have diminished for two straight quarters. After a 4.6% drop in the fourth quarter of 2022, per AP, S&P 500 companies’ profits contracted by 2% last quarter.
What To Expect in 2023?
According the FactSet’s Earnings Insight, the estimated earnings decline for the S&P 500 is -7.2% for the current quarter. If this drop materializes, it will be the largest earnings plunge since the second quarter in 2020 (-31.6%).
While consensus expectations are that there will be a significant decrease in earnings for Q3 2023, predictions were similar for last quarter. Even if the current earnings season reveals a less-than-anticipated decline, reduced growth in almost every sector could cause major pullbacks in economic activity.
According to Yahoo Finance, consumer discretionary and communications services are the only sectors expected to experience second quarter earnings growth. Reuters noted that year-to-date S&P 500 gains have been “propelled by a handful of megacap growth and technology names,” obscuring the performance of waning sectors like healthcare, financials and energy.
What an Earnings Recession Means to the American Consumer
Even though some analyst firms, like Goldman Sachs and UBS, have hinted that the second quarter of 2023 might be the bottom for the current downward earnings trend, frustrating inflation and continued big tech layoffs can be seen as portents of a prolonged economic downturn.
If investor confidence falters, stock prices may slide further, provoking the nervous to be extra attentive to profit expectations and forecasts. Skittish investors may potentially sell off holdings and claim whatever profits they can before trends continue.
Forbes recommended diversification for top-heavy portfolios. While AI investment continues to be all the rage, the addition of defensive capital investments, especially in sectors that are more resilient to recessions — consumer staples, utilities and healthcare — might be the best strategy to balance your portfolio.
Ongoing layoffs and rising rates have forced consumers to reassess their spending habits yet again. Higher prices will substantially impact Americans who are already less inclined to spend and are inspired to save where they can, even forgoing basic necessities and health care.
You don’t have to look far to find fellow Americans losing their jobs, falling deeper in debt and struggling to keep up with rising prices. While the labor market seems bulletproof and possibly the main reason the country isn’t going through a deep economic recession now, an earnings recession could push companies to lay off more workers and hire less.
It might be too early to jump to conclusions about an impending economic recession, but that doesn’t mean an earnings recession isn’t near or upon us. Hopefully UBS and Goldman Sachs are right about Q2 being the basement, because a drawn-out earnings recession will be tough on the consumer.
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