As profit recession hits, Wall Street hopes it’s the bottom

NEW YORK (AP) – Profits are falling for companies, and the only question is how much worse they will get.

Big U.S. companies are lining up to report how much profit they made during the first three months of the year, with the reporting season kicking off in earnest on Thursday and Friday. The widespread expectation is that companies across the S&P 500 will report the biggest drop in earnings since the spring of 2020. That’s when the pandemic was demolishing the global economy.

Still-high inflation, a struggling manufacturing industry and signs of slowdown elsewhere in the economy mean analysts expect S&P 500 companies to report a 6.6% drop in earnings per share from a year earlier. Besides being the sharpest drop in nearly three years, it would also mark a second straight quarter of profit decline for the S&P 500, according to FactSet. That’s something investors call a “profits recession.”

The good news for companies is that many analysts see this as the bottom. They’re forecasting profit declines will moderate from here, before flipping back to growth later this year.

The bad news for companies is many skeptics think such forecasts are way too optimistic.

Many of the forecasts for first-quarter results don’t account for much damage from the banking industry’s struggles. A crisis of confidence last month unleashed massive movements of cash through the banking system, and the worry is that all the turmoil could lead banks to pull back on lending.

That would come on top of already high interest rates meant to drive inflation lower, and it could result in lower hiring, growth and economic activity overall.

“I think we’re unlikely to see anything in the numbers” from banking woes in the first quarter, said Zach Hill, head of portfolio management at Horizon Investments. “What we’re really going to be looking for is commentary on the rest of the year” from CEOs” both on the bank side and across a lot of the consumer-facing companies to see where things are on that front.”

Analysts on Wall Street are still forecasting S&P 500 companies will eke out 1% growth in earnings per share over the whole year, versus 2022, according to FactSet.

“That’s way too too high,” said Amanda Agati, chief investment officer of PNC Asset Management Group.

The economy has been slowing and may fall into a recession this year. Even mild recessions have historically seen earnings fall roughly 10% from peak to trough, Agati said.

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