Earnings season has been ‘better-than-feared,’ however recession warnings indicators are nonetheless flashing, Financial institution of America says. It’s ‘too early to rejoice’

Wall Avenue’s expectations for the second-quarter earnings season weren’t precisely excessive. 

Earlier this yr, economists and analysts at main funding banks feared excessive inflation and rising interest rates would mix to tug company earnings decrease within the spring. However up to now, Bank of America says the outcomes have been “better-than-feared.”

Amongst S&P 500 firms, 279 companies, comprising 71% of the blue-chip index’s earnings, have reported their monetary outcomes by Monday. Total, these firms have managed to beat analysts’ earnings per share estimates by 3%, Financial institution of America strategists, led by Savita Subramanian, mentioned in a analysis observe on Monday.

“Outcomes had been higher than feared, particularly with extra above-consensus steerage than under, which was the largest constructive shock,” they wrote. “However we’re nonetheless within the very early innings of [the] downturn and estimate cuts.”

Even with the modestly bullish outcomes, and a greater than 9% restoration within the S&P 500 over the previous month, Financial institution of America argues the bear market has extra room to run. 

The funding financial institution’s strategists observe 10 key “bull market signposts” which have traditionally indicated the top of bear markets, and as of Monday, simply 30% had been signaling the worst is over for shares, in comparison with 80% on the finish of earlier bear markets. These signposts embrace elements like adjustments in unemployment, energy within the manufacturing sector as measured by the purchasing managers’ index (PMI), and the slope of the yield curve (or the distinction between lengthy and short-term rates of interest on authorities bonds.)

The Financial institution of America crew additionally famous that solely 60% of shopper discretionary firms have reported their monetary outcomes up to now within the second quarter, and the sector has been underneath extra stress than most, which might imply extra earnings misses are on the horizon.

Wanting forward, the strategists additionally identified that bear markets usually backside after earnings per share estimates have been minimize sharply, and S&P 500 firms have revised down their second-half earnings per share expectations by simply 2% since July 1. 

“Furthermore, bear markets at all times finish after the Fed cuts [interest rates], which seemingly is not less than six months away,” the strategists wrote. The Federal Reserve has raised rates of interest four times this year hoping to fight inflation, and Fed Chair Jerome Powell mentioned final week that more hikes could possibly be on the best way.

For the Financial institution of America crew, all of those elements imply it’s “untimely to name a backside” in shares, and, on prime of that, there are worrying indicators {that a} recession could possibly be coming to make the state of affairs even worse for traders.

Ailing company sentiment and shopper energy

Financial institution of America believes a light U.S. recession is now all but inevitable over the following yr, and on Monday, its strategists revealed much more proof from the second quarter earnings season to again up this view.

First, they famous that company sentiment in second-quarter earnings calls “plummeted” in comparison with a yr in the past, hitting “related” ranges to what was seen throughout the Nice Monetary Disaster (GFC) of 2008.

Second, mentions of “weak demand” on company earnings calls are actually “not far off GFC ranges, whilst analysts proceed to see earnings development accelerating in 2023.” And third, layoff bulletins have jumped dramatically in latest weeks, “including to recession considerations.”

Nevertheless it’s not simply firms which might be combating slowing financial development and inflation.

Financial institution of America discovered that 40% of People are actually having problem overlaying their month-to-month bills. That’s 2 proportion factors above the worst degree seen throughout COVID-19, and it could possibly be an indication that sky-high shopper costs are starting to hinder People’ means to make ends meet.

Despite the fact that customers boosted their spending by 1.1% in June, there may be proof {that a} bearish spending development is rising. Take the personal savings rate, which measures how a lot customers save as a proportion of their disposable private revenue, for example. The important thing measure fell to only 5.1% in July, nicely under the 8.3% seen in February 2020 earlier than the pandemic.

And there are indicators youthful customers want to bank cards to make up for gaps of their means to cowl bills as nicely. Bank card balances for folks aged 25 and youthful soared 30% year-over-year within the second quarter, in accordance with knowledge from the credit score rating firm VantageScore, per Reuters.