US Economy on Verge of Recession after Wall Street Recorded Longest Profits Decline Period: Bloomberg

The US economy appears to be on the brink of recession after Wall Street recorded the longest decline in corporate profits in 7 years, according to Bloomberg.

As the first-quarter earnings season draws to a close; It is estimated that the profits of the S&P 500 companies decreased by an average of 3.7% compared to last year.

While Bloomberg Intelligence data shows that 78% of companies exceeded expectations; this is less impressive than it sounds, given that analysts had lowered their forecasts before the season started.

More importantly, this was the second straight quarter in which US corporate profits fell. Profit decline expectations are currently focused on the period from April to June, as “Bloomberg Intelligence” data indicates a decrease of 7.3%.

Analysts believe that the negative effects of the rise in interest rates and the decline in consumer demand will extend to the third quarter of 2023, retreating from previous expectations that the profit recovery will begin by then, and this means a longer contraction in profits than it was during the pandemic.

 The last time earnings fell by more than three quarters was in 2015-2016, when the Federal Reserve kicked off its latest rate hike cycle, and the S&P 500 has not made any gains since Wall Street's big banks kicked off earnings season in mid-April. It wouldn't be surprising.

“Optimists note that analysts' worst predictions were not met, and that a large percentage of companies exceeded their targets in the first quarter,” said Maria Wittmann, chief multi-asset strategist at State Street Global Markets. Pessimists say profits are falling and prospects are poor.”

The slowing economy is affecting profit margins, as the consensus of forecasts is that they will not recover until the fourth quarter of 2023. 

PayPal Holdings was among the companies that recently warned that adjusted operating margins would not grow as quickly as expected. Tyson Foods also lowered margin expectations.

Morgan Stanley strategist Michael Wilson expects a further decline in the margin in the coming months, as labor costs represent a strong headwind, and the weak economy hinders the possibility of companies imposing the price they want without hurting sales.

Technology companies were a bright spot in the first quarter, as Apple, Meta Platforms, Google parent Alphabet and Amazon.com all beat expectations. It also benefits from signals from the Federal Reserve to stop raising interest rates.

However, the sector's profits are expected to decline by more than 7% in the second quarter. Furthermore it; technology makes up 35% of S&P's market cap share, but just under 30% of its earnings, Bloomberg Intelligence analysts note. They expected technology, media and telecom earnings growth to lag behind the broader index through 2024, leaving stocks vulnerable.

AI developments may prove to be a key factor in this regard, having already fueled the rally in Nvidia, Microsoft and Alphabet. The three companies are racing to add artificial intelligence features to their products, making them among the biggest contributors to this year's S&P 500 gains.