Corporate Earnings Recession
Despite what GDP may say the mothers milk of an economy is the health of corporate earnings which in turn will determine such things as hiring, investment, wage levels etc which are inputs into GDP. An earnings recession or an economic recession (using GDP) is defined as one seeing 2 quarters of decline. IF ONE ANALYZES CORPORATE EARNINGS ALL IS NOT WELL WITH THE US ECONOMY. According to Factset, S&P 500 corporate earnings fell 0.3% in 1Q19 and with 50% of companies reporting as of 8/1 2Q19 earnings are down 1.86%. For 3Q19 earnings are expected to FALL AGAIN by 2.1% vs 1.1% at the start of the earnings season. Much of the reason is tied to International Companies vs domestic ones (as earnings are still healthy), but the fear is that earnings will start to decline for latter as well. Much of this decline is directly linked to Trade uncertainty. I should note the record share buybacks ($1 Trillion according to Bank of America in 2019) using cheap debt by US Corporations make these declines seem BETTER given how earnings are calculated. As a result, on a Net Income basis these declines are SUBSTANTIALLY WORSE. Going forward in 2020 with the Trade deal on hold, risk to further declines are elevated. The implications are profound especially on reported EPS because as stated if buy backs wane the reported EPS may be negatively impacted going forward. If US corporations deem growth prospected waning, given very high corporate debt, they will likely look to preserve cash. And one way is to slow share buybacks.
Analyzing larger company earnings can not only be used as leading indicator for the economy but the direction of smaller businesses cash flow. And the direction is NOT GOOD in the near term so prepare accordingly. The key to 2020 will likely be tied to a trade deal in our view and less so from rate cuts by Federal Reserve. At TheProfitConsultant.me we go beyond accounting to analyzing a broader set of metrics to help owners manage, plan & improve cash flow and in turn the value of their business. Contact us if your are interested in preparing your company for slower growth ahead.