Resilient US earnings buck recession fears
Corporate America is still going strong, bucking Wall Street’s recent angst that an economic recession may be looming.
Earnings season in the US has gone better than analysts anticipated. Despite early forecasts for dismal second-quarter results, earnings for S&P 500 constituents are down just 0.4 per cent as of Monday, by which time nearly 93 per cent of the index had reported financials, according to FactSet. Analysts were looking for a 2.8 per cent decrease in earnings as recently as July.
Income for the most recent three-month period is on track to post a 0.6 per cent fall, based on a combination of official results and current estimates for pending reports.
If the projected decline in earnings holds true, it would mark the first “earnings recession”, or consecutive quarters of year-over-year declines, since 2016. However, a majority of S&P 500 companies have beaten estimates thus far. As of August 9, three-quarters of the companies to report earnings had booked a better profit against average forecasts.
Consensus estimates “were too pessimistic, as they were in 1Q 2019, and we see modest upside risk to 3Q and 4Q estimates”, Goldman Sachs said in a note to clients Friday.
Analysts at the bank estimated that earnings per share across the S&P 500 grew by 1 per cent in the second quarter, noting that lower-than-expected effective tax rates contributed to the rosier results. They also said tariffs “pose only a modest risk” to profit margins, since many corporations continued to build inventory during the quarter to protect against an escalation in the US-China trade row.
Goldman Sachs is looking for earnings growth of 3 per cent for the full year and 6 per cent in 2020.
“Forward looking signals from the 2Q reporting season support our forecast that the S&P 500 will climb 7% through year-end,” the analysts added.
Optimism over corporate earnings stands in contrast to broader fears over the US economy. Investors have grown increasingly wary of a potential recession — or back-to-back quarters of contraction — amid slower global growth and trade tensions between the US and China, even as domestic unemployment remains low and the Federal Reserve delivered a rate cut in July.
Investors were unnerved last week by an inversion in the 10- and 2-year yield curve. An inverted yield curve — when the yield on long-dated debt falls below that of short-dated debt — is considered a sign that investors expect a recession.
Economists are split over when a recession may transpire but expect one later than previously thought, according to a survey by the National Association for Business Economics. The group said Monday that just 2 per cent of economists believe the US economy will slip into a recession this year, compared with 10 per cent in a February survey. Meanwhile, 38 per cent see a recession coming in 2020, down from 42 per cent, and 34 per cent expect a 2021 recession, up from 25 per cent.