Stock market: Are we headed for an earnings recession?

Yahoo Finance Live’s Jared Blikre breaks down the move lower in EPS estimates, a historical view of the stages of recession, and whether the U.S. economy is seeing weakness in earnings and industrial sectors.

Video Transcript

- Traders may have taken profits off the stock market's heated start to the year, but as earnings results continue, companies are increasingly citing inflation, supply chain disruptions, and other headwinds. As we get halfway through results season, let's take a look at where corporate profits stand thus far and what they can tell us about the likelihood of a recession. For that, let's get to Yahoo Finance's Jared Blikre. Hey, Jared.

JARED BLIKRE: Hey, Rochelle. You said the r-word, so let's dig into that. We're talking about an earnings recession. Now, we have been talking about a general economic recession in the United States, but it usually begins with an earnings recession, first, and then an industrial recession, and then an economy wide recession. And I'll get into the details of what differentiates those three.

First, are we heading for an earnings recession with respect to stocks? And this is tracking the S&P 500 EPS, and one year ago, for the first quarter of 2022, we had an EPS in the S&P 500 of, I believe, 225.6, thereabouts. And we're coming in this year so far at about 221, so that's why we are seeing a little bit of negative growth in EPS.

So you compare this to what we saw during the pandemic, what we saw during the global financial crisis, the dotcom boom, even the recession, the general economic recession of 1991. We still have not really eclipsed those downward levels. Now, what this is very similar to so far is what happened in 2015 and 2016. That's when we had an earnings recession in the US, while the rest of the world developed into a general recession in their economies, most of the world, anyway, and here in the US, we almost had a bear market.

Now, we didn't hit quite the 20% down mark, and this was 2015, 2016. But we came very close. So a lot of people who rely on that definition of a bull market being down 20% miss this right here, but the price action was very much like a bear market. Now, when we have a bear market without a recession, a lot of times, it tends to be shallower and not as long lasting.

So in the US, we didn't quite get down to 20%, but that was pretty much the end of it. And it was rather short lived. So nice to think that could happen this time. Now, what we would want to see, this is fourth and probably in the bag that we're going to have that negative earnings growth in the S&P 500 for this quarter. What happens next quarter is going to be telling.

It's possible that we fall off a cliff and that we start generating some downward bars that look more like this. It doesn't have to happen that way, but we're going to be on alert for that. Because if we start getting those, it's going to be much more likely that we develop into a general economy wide recession. Now, it's important to point out that the United States is a huge place, and we can have relative prosperity in one place and relative non-prosperity in another. But let me just show you how this is playing out in the labor market.

I prepared these slides a couple of weeks ago to demonstrate something else, but I think it's very relevant to the topic at hand. Job losses surrounding recessions, this is where we feel them first, startups and high growth, but then in manufacturing, construction, and wholesale trade. That's the industrial side of the economy for the most part, and that's where we're seeing some weakness right here. So if we see these job losses accelerating, we're not seeing that.

Friday, these jobs were very strong. So if we see these accelerating to the downside, probably concurrent with some negative EPS in the second quarter and maybe a general wide economy recession later on in the year. But so far, we're not seeing that, and so far, we're just looking at this one little, negative bar right here. So maybe not the evidence we need to get too worked up for in the meantime, Rochelle.

- It's always tough when we get that one data point, and you wonder how much to put into it, but interesting perspective that as we look at, historically, what that has meant for the economy. Great stuff there, Jared Blikre, there for us.