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Illustration: Rebecca Zisser/Axios

After predicting eye-popping 11% first quarter profit growth for S&P 500 companies last year, analysts have massively scaled back expectations to the tune of roughly $16 billion in profits. They are now predicting the first year-over-year decline in 3 years.

Why it matters: Those lofty expectations had been set as recently as March and have come down drastically since, with some now predicting an "earnings recession" — negative earnings growth in the first two quarters of the year.

  • The drawdown in expectations has its origins in many of the same factors that economists say could cause an unexpected economic recession: overhang from the trade war and fears that damage from the Fed’s contentious rate hiking cycle has already taken hold.

What happened: Estimations of how much and how long companies would benefit from tax reform were way too high, judging by the ratcheted up expectations after passage of the tax bill, which have since been revised down.

  • But disaster may not be imminent.

The big picture: There’s no clear correlation between an earnings recession and an economic recession. The last earnings recession started in the third quarter of 2015 and the economy continued to grow.

  • "Equity returns can still be positive [during an earnings recession], but they will likely be weaker than they otherwise would have been," Mike Wilson, an equity strategist at Morgan Stanley, wrote in a note to clients this week.

Be smart: If an earnings recession does happen it's expected to be short-lived. Analysts still expect fourth-quarter earnings to be 9% higher than they were a year previously.

Expand chart
Data: FactSet; Chart: Chris Canipe/Axios

Analysts' expectations for S&P 500 earnings growth this quarter started to drift downward from 6% at the end of last year — in the midst of the stock market sell-off — to the current estimate of -1.2%.

  • Meanwhile, Q4 earnings growth expectations are on the upswing as S&P 500 companies report stronger than expected results. But growth estimates for Q1 are declining as those companies give soft forward-looking guidance.
  • So far, 53 S&P 500 companies have issued negative guidance for Q1, while only 12 have revised guidance upward, according to FactSet.

Go deeper: Corporate profits aren't as great as you think (and might not last)

Go deeper

55 mins ago - World

Netanyahu and Israel reluctantly adjust to a post-Trump Washington

Netanyahu (R) and Biden in 2010. Photo: Avi Ohayon/GPO via Getty

Prime Minister Benjamin Netanyahu and his close aides are very nervous about the transition to a new U.S. administration after a four-year honeymoon with Donald Trump. One Israeli official told me it felt like going through detox.

What he's saying: Netanyahu congratulated Biden minutes after he was sworn in, saying in a statement that he looked forward to working together to "continue expanding peace between Israel and the Arab world and to confront common challenges, chief among them the threat posed by Iran."

Updated 2 hours ago - Politics & Policy

Coronavirus dashboard

Illustration: Aïda Amer/Axios

  1. State of play: New coronavirus cases down, but more bad news ahead.
  2. Politics: Biden set to immediately ramp up federal pandemic response with 10 executive actions — Scoop: Joe Biden's COVID-19 bubble.
  3. World: Biden will order U.S. to rejoin World Health OrganizationBiden to bring U.S. into global COVAX initiative for equitable vaccine access.
  4. Vaccine: Amazon offers to help Biden administration with COVID vaccine efforts.
Dion Rabouin, author of Markets
3 hours ago - Economy & Business

First glimpse of the Biden market

Photo: Jonathan Ernst-Pool/Getty Images

Investors made clear what companies they think will be winners and which will be losers in President Joe Biden's economy on Wednesday, selling out of gun makers, pot purveyors, private prison operators and payday lenders, and buying up gambling, gaming, beer stocks and Big Tech.

What happened: Private prison operator CoreCivic and private prison REIT Geo fell by 7.8% and 4.1%, respectively, while marijuana ETF MJ dropped 2% and payday lenders World Acceptance and EZCorp each fell by more than 1%.