Lackluster profits create an earnings recession
We are well into earnings season now, and things aren’t looking so good. In fact, a lot of folks are talking now about an "earnings recession." The S&P P 500 is technically already there, with two quarters of negative growth in earnings. Once all the chips fall for the fourth quarter, analysts expect about a six percent drop in corporate earnings for the S&P 500.
"An earnings recession...is kind of similar to an economic recession in the sense that profits have stopped growing and have actually started declining," said Sheraz Mian of Zacks Investment Research, "and many of the factors that give you an earnings recession, are effectively the same as you have as an economic recession."
It’s primarily low oil prices dragging the S&P down, plus slowdowns in markets overseas. But analysts do use corporate earnings to predict what’s ahead for the broader economy, said John Challenger is CEO of consulting firm Challenger, Gray and Christmas. "If earnings continue to lag, that’s going to put pressure on these companies to cut back on their costs, and that does lead to layoffs," said Challenger. Especially, he said, since "the pressure from their shareholders is relentless."
Plus, there’s a history of links between earnings recessions and broader economic problems, according to Sam Stovall of S&P Capital IQ. He said, since World War II, ten out of 13 such profit recessions led to real recessions. But, "our belief is that this time will be similar to the three times we did not end up with an economic recession," said Stovall.
That's because despite global problems, the U.S. economy is mostly doing okay, with strong jobs numbers and low inflation. But the market spooks easily, and we will probably end up with a lot more economic uncertainty.