Corporate America’s earnings will spell out the chances of a US recession

Several top financial firms and consumer companies are reporting their third-quarter earnings
In a frenzy.
In a frenzy.
Photo: Brendan McDermid (Reuters)
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As several top financial firms and consumer companies are reporting their third-quarter earnings this week, alarm bells over the state of the US economy could ring louder.

Market watchers are spooked by a series of persistent threats to consumer firms with big international footprints:

🇷🇺 Companies that have pulled out of or delayed financial dealings in Russia since its invasion of Ukraine are doing less business by default

😷 China’s zero-covid policy is hitting the revenues of US-based companies operating in the region

💸 From tech giant IBM to pharmaceutical and packaged goods firm Johnson & Johnson to streaming service Netflix, firms across industries saw hundreds of billions of dollars of revenue wiped out because of the strong dollar last quarter. This quarter has started off on the same footing with the robust greenback continuing to hurt earnings for multinationals like Levi Strauss Co.

Financial bigwigs earnings calendar

By the digits

12: the number of economics recessions since 1948

19: the number of earnings recessions since 1948

22: the number of earnings recessions since 1948 in real or adjusted-for-inflation terms

5-6%: How much of the earnings for S&P 500 companies the dollar’s strength could cut, up from 2% last quarter, according to Ohsung Kwon, US equity strategist at Bank of America Securities

Economics recession vs earnings recession

An economic recession—loosely defined as GDP falling for two consecutive quarters in a row—isn’t quite at America’s doorstep yet.

📈 Inflation may be high, but it is slowing down

💪 The labor market is strong with the unemployment rate falling

🏠 Household balance sheets are in good shape, which is keeping spending robust

🛍️ Retail sales, excluding vehicle and gas spending, are still ticking up

🗂️ Corporate profits are far from stilted

🏦 The tighter monetary policy is too recent a move to plunge the economy into a recession so soon

However, what could be a lot closer is an earnings recession, defined as two consecutive quarters of profit decline. Big corporations will report a grim outlook sooner rather than later:

🎰 Many businesses—especially those catering to stay-at-home trends—“over-earned” in the pandemic’s aftermath, and will now look to correct course for longevity

👀 Business leaders big and small have been anticipating a recession for months now, dimming their confidence and expectations. And they don’t think the central bank is done with its rate hikes just yet

✂️ Anxious companies cutting everything— ad budgets, expansion plans, jobs, and more

Banking on banks?

Banks are particularly under pressure at a time of economic uncertainty. Major Wall Street names are expected to report weaker third-quarter profits, but there will be areas of resilience. Rising interest rates, which makes lending more profitable, should boost their business.

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