Dampening Earnings Outlook Signals US Corporate Recession?

Dampening Earnings Signal Corporate Recession?

A recession is generally defined as two consecutive quarters of negative growth. You may be, of course, familiar with the idea of an economy in recession, where GDP growth is in decline for two consecutive quarters (as measured year over year).

The same concept can be applied to earnings.

When earnings growth slows markedly or declines outright, there’s a ripple effect.

For one thing, firms have less money to invest in projects and in growth – which eventually hits revenues of other companies, and can slow hiring efforts.

And, since Wall Street optimism is predicated on earnings growth (and the expanding multiples, price to earnings among them, investors will embrace as they chase and pay up for growth), dampened earnings optimism means stocks may sputter.

And if stocks sputter, then the wealth effect takes a hit. If the wealth effect takes a hit, then consumers feel they have less to spend on, say, big-ticket items like cars and homes, or at the counter of their favorite retailer.

As Reuters has reported, the earnings outlook is souring a bit, and the risk is that U.S. firms “may slip into a recession before its economy does,” and that Europe may follow in those earnings and economic footsteps.

The newswire has said that the earnings estimates for the current (that is, first) quarter now see a 30 basis point decline year on year, where just a few months ago that same measurement was slated to grow more than 8 percent – marking the first outright decline for U.S. firms in three years.

At the moment, there is still growth in the cards for the remaining three quarters of the year, which would indicate that a recession would be skirted. But even so, growth for all of 2019, with the negative first quarter and subsequent positive second, third and fourth quarters, means that annual bottom-line growth should be a bit more than 4 percent, down from the 10 percent estimated back in October.

In the meantime, as profiled in this space a few weeks ago, corporate debt remains high, and leveraged companies may not be able to use equity to shore up balance sheets – and all the while, it gets ever harder to service debt.