EPS and GDP Are Going Higher
And “recession” talk is going lower.
Here’s a cool stat to start the day.Over the last month, the consensus forecast for second-quarter earnings growth has risen from 9 percent to 9.8 percent.
“That may not sound like a lot,” as Eddy Elfenbein points out, “but analysts are usually lowering their projections at this point in the quarter.” It’s the first time since the fourth quarter of 2021 they’ve upped their forecasts.
As of Wednesday, 437 companies in the S&P 500 had reported. That’s 87 percent of the index, and 81 percent beat earnings estimates.
Those that beat did so by a median of 7.9 percent. Those that missed are off by an average of 5 percent.
Sixty percent of the S&P 500 has beaten revenue forecasts, with a median beat of 19 percent.
According to FactSet, EPS will grow 5.2 percent year over year, up from forecast of 3.4 percent as of March 31. And that would be the fastest pace of earnings growth since 2022.
“Corporate profits are important because they show the U.S. economic engine continues to purr,” writes Justin Lahart of The Wall Street Journal.
Lahart notes that other economic indicators such as consumer-sentiment readings have been downbeat and inflation has ticked up.
Still, “a strong US profit performance typically points toward continued expansion.”
The Atlanta Fed GDPNow tool agrees with that general assessment, printing at 4.2 percent on Wednesday.
The word “recession” appeared in 100 transcripts of earnings calls and investor events this season. It appeared in 302 transcripts from the first quarter of 2023.
Now it’s down to its lowest count in two years. As Lahart explains it, “Companies, instead of feeling a need to temper analysts’ optimism and nudge estimates lower, are upbeat themselves.”
So how long can this go on?
Jim Bianco of Bianco Research offered an extended and dramatic if indirect answer to this question on X on Wednesday. Here’s part of it:
Too many think the economy will either roll over or "pop." It does not work that way. It does not die of old age.
In a capitalist economy, investors, like most of those reading this, give money to good ideas and take it away from bad ideas. This means the economy continuously self-adjusts, so the natural state is to expand and grow 90% of the time.The other 10% of the time is a recession because something murders it.
The bottom line is recessions are not predictable – never have been, never will be.
“How do we know when the murder has happened?” Bianco concludes: “Investors lose a lot of money. A recession means that even investors' good ideas act like bad ones.”
That doesn’t mean we should live in fear.
It does mean we should be prepared for the unpredictable by having a plan and making sure our portfolios are diversified.
