Risk of earnings recession rises, as S&P 500 profits to fall for first time in 3 years

Investors should start bracing themselves for an earnings recession, with first-quarter numbers for the S&P 500 expected to suffer the first decline in nearly three years, as macroeconomic headwinds continue to pull down analyst estimates.

John Butters, senior earnings analyst at FactSet, said that as of April 5 more companies are cutting earnings guidance than usual, leading analysts to make bigger cuts to their forecasts. He said 74% of the S&P 500 SPX, -0.16% companies that have issued earnings guidance have lowered expectations, above the five-year average of 70%. As a result, the average analyst EPS estimate has been lowered by 7.3% during the first quarter, compared with the five-year average decline of 3.2%.

But perhaps more important for the outlook for the stock market is that the blended EPS growth estimate for the second quarter slipped into negative territory on Wednesday, to -0.2% from a rise of 3.4% as of Dec. 31. “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”The report came as Congress works to pass the United States-Mexico-Canada Agreement, or USMCA, a treaty that aims to replace the North American Free Trade Agreement, known as NAFTA.

“The president has tweeted that “trade wars are good and easy to win’,” said the report. “These businesses, whose numbers will grow exponentially if Trump follows through on new tariff threats, would beg to differ.”“According to simple estimates the concerns over trade policies might have erased up to ~10% of S&P 500 value over this past year,” they wrote this week.

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