Wall Street faces its longest profit downturn in seven years as the US economy braces for recession. The earnings of S&P 500 companies have dropped an average of 3.7% compared to last year. Despite 78% of firms surpassing expectations, this is less impressive than it sounds since analysts had set a low bar.
This suggests a longer-lasting profit downturn than during the pandemic. The last earnings drop of over 75% occurred in 2015 to 2016 when the Federal Reserve began its last interest rate hike cycle. Consequently, the S&P 500 index has not posted any gains since the earnings season began in mid-April.
While optimists point out that the worst analyst predictions did not come true and many companies exceeded their targets, firms have started to lay off workers across various industries. This cost-cutting measure is likely to impact April-to-June period earnings.
According to Michael Wilson, a Morgan Stanley strategist, labor costs will continue to pose a significant challenge to companies over the next few months. A softer economy will also limit companies’ pricing power, leading to more profit losses.
Banking sector also experiences headwinds. Although interest income, trading revenues, and deposit inflows at banks increased, the banks are facing issues due to higher costs and lower margins, which in turn will further impact their profit earnings.
In summary, the US economy faces an imminent recession while the S&P 500 companies undergo a prolonged profit downturn. Despite some companies exceeding expectations, the majority have suffered profit losses leading to layoffs and uncertain earnings forecasts. As the economy softens, the challenges faced by businesses are likely to worsen.
Source of this Article: Economic Times
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