Just as profits start growing again, the economy is starting to slow, leaving one thing abundantly clear: There’s no escaping a recession.
Stocks, though, haven’t reacted all that well, despite 80% of companies reporting earnings beats. The lackluster performance prompts the Sevens Report’s Tom Essaye to describe earnings as not good, but also not bad. To qualify as good, companies would have needed to raise their guidance, but instead 2024 profit estimates for the S&P 500 sit at $242 a share, near where they were before the start of earnings season.
Still, it would be a mistake to dismiss the possibility of a slowdown, as the preponderance of evidence begins to suggest that the odds of one are rising. Leading indicators continue to point to a recession, while the drop in M2 money supply continues at a pace that suggests one, too. The latest Fed Senior Loan Officer Survey showed some improvement in U.S. bank lending, but it’s still at levels that are indicative of an approaching recession, writes Deutsche Bank’s Jim Reid.
And then there’s the yield curve—yes, the same yield curve that had everyone freaking out about a possible recession back in 2022. At this point, it would seem that the difference between short- and longer-term Treasuries would have lost their credibility as a recession predictor, but we’d argue that the inversion has been misinterpreted rather than faulty. While the initial inversion should put investors on watch for a recession, the real countdown begins when it reaches its maximum point.
That’s a wide range of outcomes, but the stock market doesn’t see it that way. Analyst estimates reflect 11% growth for S&P 500 earnings, far higher than the 30% contraction that typically occurs around a recession, explains DataTrek Research co-founder Nicholas Colas, while the index trades at 18 times 2024 estimates, not the 28 times suggested by a recessionary decline. Even a mild recession, such as the one that occurred in 1990-91, caused earnings to decline 16%.