Corporate profits are expected to decline this quarter
The weekslong festival of conference calls that is earnings season has its informal start Friday morning.
Driving the news: Analysts are expecting the S&P 500 to produce earnings per share of $49.96, a drop of roughly 6% from the first quarter of 2022.
Why it matters: If that comes to pass, it'll be the second straight decline in year-over-year earnings growth, the first such "earnings recession" since the COVID crisis.
💭 Our thought bubble: Shrinking earnings aren't a tragedy. In fact, it's another sign that inflation is coming down to earth again, which is what everybody is supposed to want.
- If we do have two straight quarters of shrinking profits, you'll hear a lot of chatter about how such an "earnings recession" bodes ill for the health of the U.S. economy. Ignore it.
- Analysts expect that corporate earnings will be strained not by a drop in top-line sales — which can be a decent measure of economic activity — but by shrinking margins.
Flashback: When inflation was ripping hard in 2021-22 companies were able to jack up prices with ease.
- That resulted in record high profits, despite public bellyaching from executives about the higher costs of virtually everything, including labor.
But, but, but: As price increases have slowed, companies have had a harder time passing along cost increases to consumers. That means profit margins, which were at the highest since 1950, have to come down a bit.
- And that means earnings per share could well take a hit.
- Worth noting: Even at the "earnings recession" levels that analysts predict, EPS would still be noticeably greater than any quarter in the pre-pandemic era.
Zoom out: The vast majority of earnings reports don't matter much to anybody who isn't a shareholder.
- But big surprise losses, or profits that trounce expectations, can set the background mood music for the markets.
- Also, comments by corporate executives in conference calls with analysts can gin up new worries for investors or ease concern about known issues.
One thing to watch: Analyst expectations are almost always too pessimistic.
- That's because their estimates are driven by conversations with corporate executives, who typically like to underpromise on earnings, and then over-deliver with a better-than-expected number, thus generating a satisfying pop in the share price.