Another earnings season is effectively over. The results, as always, were all over the map, but at this stage there’s very little doubt: Corporate America collectively made it through the spring storms in better shape than last year.
And the executives who have the best insight of all into the underlying health of their ongoing operations see their expansion rates slowing a little this summer . . . but a little less positive growth is a long way from a crash signal.
They think they’ve got this covered. Whether they’re right or wrong, we’ll have to wait until October to know for sure.
With that in mind, it’s not shocking that stocks have come a long way back from the depths. Unless the Fed finds some lost power to shock, there’s nothing to get in the bulls’ way between now and the start of next earnings season.
That’s nine weeks away. In the last eight weeks, the S&P 500 has rallied 16% and the NASDAQ is up 21% . . . who wants to miss out if this is only the middle of the run?
After all, when stocks are so depressed and are now moving so fast in the other direction, October is practically another planet. But let’s test the logic and make sure Wall Street has finally climbed all the walls of worry.
The Earnings Shadow Shifts
Profit comes first. If the numbers keep moving up from year to year, it’s pretty hard for anyone to argue that Corporate America is going backward. For now, there’s no sense of an overall recession in the trailing quarter . . . and little sense of one in the current quarter either.
Guidance supports a general feeling that S&P 500 companies can report close to 6% growth when October rolls around. That reflects their operations in the current quarter, the world we live in right now.
It isn’t great. It isn’t even enough to keep up with ambient inflation. But it’s far from the catastrophic lurches we felt in big recessionary periods like the COVID lockdowns or the 2008 crash.
And while not every company projects future growth beyond the current quarter, the trends add up strongly enough that the fourth quarter, when it comes in, can get the year-over-year trends accelerating again.
Right now, it looks like earnings growth slows from 6.7% in the second quarter to 5.8% in the current quarter and then picks up a little more speed, hitting 6% again by the end of the year if all goes well.
In that scenario, this is as sluggish as growth gets. Corporate America dodges a true earnings recession. The worst we have to deal with is an earnings slowdown . . . and it’s happening right now.
By the end of September, activity improves. Ideally, inflation cools off, giving the Fed a chance to pause and survey its work. Cooler inflation helps companies control costs and restore their margins.
We could see 11% earnings growth all in all this year. That’s historically pretty good. To the casual observer, it almost looks like a boom . . . and for once, without any of the noise from the pandemic and the Fed’s gyrations.
That’s what a normal healthy economy looks like. It only feels like a recession against the backdrop of the fever of the free money era. At least, that’s the way Wall Street sees it.
And the thing about Wall Street, as you know, is that it looks ahead. If the current quarter is as bad as earnings trends get, we’ll get evidence of that in October. Guidance will be optimistic, relieved, even relaxed.
The worst will be over. From Wall Street’s perspective, the “recession” will be over and a fresh expansion cycle will begin. What could go wrong? Let’s run those scenarios.
Walls Of Worry Already Climbed
The bear market early this year set up a strong pattern. Stocks anticipated worst-case scenarios ahead of every Fed meeting, convinced that every rate hike meant potential disaster.
One basis point too much could have crushed a still-fragile recovery. And yet, so far, it hasn’t. Here we are in mid-August, at almost the center of the third quarter, and the indicators are still going in the right direction.
Don’t get me wrong. Layoffs are being announced . . . but they’re in niche areas of the economy like Silicon Valley and overdone startups like Peleton (PTON). Everyday people who kept their jobs through the pandemic aren’t getting fired yet.
The environment feels more like the dot-com burst than the 2008 crash. Overheated industries ran out of cash and suddenly talented people found they need to work for a living. They found jobs and rebuilt their careers.
But we’ll just have to see. For now, the Fed hasn’t triggered the end of the world. If they get the first hint that they’re taking rates too far, they’ll flinch. You can bet on that.
And for now, it seems to be working. Inflation is showing faint signs of cooling off. By January, one way or another, the impact of Russia throwing a wrench into global energy markets will roll off the year-over-year numbers.
That means that this coming winter might be worse than the last in terms of inflationary pressure, but the one after that is likely to be better.
I am not looking at energy as a positive contributor to earnings in any meaningful way after the end of this year. By then, the rest of the economy should be back in position to carry its load . . . and relief from fuel inflation will be a wonderful thing.
What else could go wrong? War and other disruptions are always a threat, but it’s hard to plan for them. Nobody seriously wants them to happen. Every serious adult in the global room works as hard as possible to prevent them.
A fresh healthcare crisis would hurt . . . but we already know how to deal with those now. Corporate leadership can pivot with a pandemic. There will be winners and losers, of course, but there are always winners and losers.
I know it can feel miserable out there. Investors are 15-20% poorer. Everything costs 15% more than it did three years ago. We’re working harder to keep from falling behind.
But corporate profits are up. Stocks that got overheated in the pandemic are back at a more reasonable price. The market as a whole is back below 18X projected earnings.
And the pattern has changed. The weeks leading to a Fed meeting don’t ramp up the existential angst any more. We’re used to it. The dread is gone.
That pattern might change again. But between now and October, I think we’re in a groove where the Fed is just a fact of life, like the weather or sports scores.
Before October, we won’t know whether the earnings projections that support that “reasonably valued” market multiple are true. If they’re too high, we could see some selling.
I doubt we’ll see the selling before then, though. Animal spirits are rising. Remember how to run with the bulls?