Two-quarters of bad GDP says we are in a recession. But earnings season says otherwise – and so do I.
The Fed is following through with its soft-landing strategy for cooling the U.S. economy, and they’re doing a pretty decent job tight roping between punishment and prosperity.
Slowly but surely, we will return the economy to a more normal equilibrium.
And we’re seeing this bear out during this earnings season.
Earnings season refers to the period of time when a large number of publicly traded companies release their quarterly earnings results. And it can tell us a lot about the economy and the state of U.S. businesses.
So far, most of the companies in the S&P 500 have reported their earnings this earnings season – over 87% as of the end of last week. So we have a pretty good idea of how things are going.
Of these companies, 75% have reported a positive earnings per share (EPS) surprise.
And another 70% of S&P 500 companies have reported a positive revenue surprise.
That means their results have been even better than expectations.
And while our earnings growth rate for the quarter has been putting a damper on things, even this number isn’t as dire as it seems.
An average 6.7% growth rate for the quarter is under the five-year average of around 12%. But this makes sense given the outsized growth we saw last year.
In 2021, we experienced more than 20% growth for four straight quarters – and an overall growth rate of 45.5%.
So it’s natural for the pendulum to temporarily swing in the other direction when we are comparing year-over-year. We’ll likely see numbers much closer to average in 2023.
So there’s nothing in the earnings reports for Q2 that should make us want to run for cover…
Where Is the Recession? Or Is It All Just Fear?
Despite the data coming out of earnings, many Americans think we are on the brink of slipping into a recession – or are already in one.
I get it… Food prices are up 10% to 12%, gasoline is up 60%, and electricity bills are up nearly 14%.
And the U.S. just closed out its second quarter with negative GDP growth. Traditional metrics would say this is the beginning of a recession.
But the National Bureau of Economic Research releases these GDP figures… and also makes the official call on if we are in a recession.
And it too is sticking to the story that we aren’t in a recession due to several strong economic indicators.
For example, a Moody’s analyst noted that we have a “bustling jobs market” and are seeing positive consumer spending and business investment. And Fed Chair Jerome Powell also cited the strong labor market in his July press conference and even questioned whether the GDP data was accurate.
Lowering fuel prices are also helping improve inflation numbers and will put the economy on stronger footing in that regard. It will just take a little time to see the effects.
And in the end, there’s one other big signal that tells me we aren’t in a recession yet…
The Chopping Block
If a major recession is on the horizon, why haven’t we seen analysts cut prices yet?
With all the bad headlines and fear in the economy, we’d think Wall Street would be taking these companies to the chopping block and heavily slashing their expectations and estimates for earnings next quarter and the rest of this year.
But that’s not what’s happening.
And it’s because Wall Street doesn’t think it’s going to happen.
For all the negativity and hate Wall Street gets –a lot of which is justifiable – it is historically good at predicting earnings and the way U.S. companies are moving.
That’s something analysts are experts in – market trends.
And for the S&P 500 as a whole, analysts are projecting a 14% price jump over the next 12 months…
After we saw the markets perform so well in July, many stocks have already seen a pretty substantial recovery. And the consensus is that we have more good news to look forward to in the long run.
So while this is a constantly evolving situation – and Q2 earnings have not finished reporting – I’d like to encourage readers to take recessionary talk with just a grain of salt.
While we’re undoubtedly in a volatile period, a recession isn’t guaranteed.
And I wouldn’t be surprised if we finish this year in as good or better conditions than when it started.
Talk soon,
Jason Bodner
Editor, Outlier Insights