Analysts Predict Three-Quarter Earnings Recession Amidst Strong Top-Line Figures and Lowered Q1 Estimates

U.S. Indices Close Higher Despite Lower Fee Revenues and Shrinking Deposits at State Street

Earnings season is in full swing as investors look beyond the banking sector and turn their attention to other areas of the economy. On Monday, the U.S. indices closed higher thanks to Charles Schwab’s stronger-than-expected Q1 results, despite State Street’s lower fee revenues and shrinking deposits causing some turbulence. Bank of America and Goldman Sachs are expected to release their quarterly figures soon, with Netflix and Tesla set to follow suit.

According to data from Refinitiv, earnings for S&P 500 companies in the first quarter are anticipated to have declined by 4.8% YoY, marking the second consecutive drop in YoY earnings growth.

While this may constitute the first “earnings recession” since the pandemic, it could also be viewed as a positive sign. Inflation is on the decline, which is impacting pricing and profit margins, but many firms are still reporting strong top-line figures as the economy continues to grow. The real problem could arise if companies surprise investors with serious or severe quarterly losses, or if executives start issuing downbeat forecasts.

Insight suggests that the current earnings recession may last for three quarters if analyst expectations are correct, mirroring the previous earnings recession that started in Q2 2020. However, analysts have lowered their Q1 estimates, and earnings growth contribution and weights will play a crucial role in determining the S&P 500 sector direction.

Overall, while the earnings recession may be a cause for concern, there are still reasons to remain optimistic about the state of the economy, and the impact that these quarterly figures may have on investor sentiment.

As the earnings season approaches, Q1 estimates have experienced a significant decline. This might result in corporations having a lower bar to beat analyst expectations and potentially surprise to the upside. However, the quality of a beat will be crucial as investors will be keen to hear from company management on a range of themes, including the macro-outlook, consumer health, impact of higher input costs on margins, employee hiring or layoffs, and future capital expenditure plans. As such, it is not just the actual earnings figure that will matter, but also the company’s overall performance and outlook that will be closely scrutinized by investors.