Wonder where the economy is heading? Pay close attention to earnings

Still, investors remain jittery about the health of the railroad business, which is a sign of jitters in the broader economy. Stocks of the top rail operators Union Pacific (UNP), CSX (CSX) and Norfolk in the south (NPC) have declined sharply this year. Even Warren Buffett’s Berkshire Hathaway (BRKB)owned by Burlington Northern Santa Fe has been taking a dip lately.
But FedEx isn’t the only company ringing the recession alarm bells. In an unusually gloomy earnings call earlier this month, the high-end furnishings retailer’s CEO said RH (RH) (aka Restoration Hardware) said that “anyone who thinks we’re not in a recession is crazy,” adding that the housing market is in a downturn that “has just started.”
The Chief Financial Officer best buy (BBY) said in late August he expects sales growth to slow further. And while the company avoided using the term recession, Best Buy’s CFO said there was “a belief that current trends in the macro environment may be even more challenging … for the remainder of the year.”
The CEO of PVH (PVH)which owns the Tommy Hilfiger and Calvin Klein brands, noted in the company’s late August conference call that “high gasoline prices and other inflationary pressures began to impact consumer cyclical spending over the summer,” adding that the postponement took place “on September Most salient for us was to middle-income and value consumers in North America.”
Chip Equipment Guide Applied Materials (AMAT) noted in an earnings call last month that some of its semiconductor customers are in slowdown mode “as macroeconomic uncertainty and weakness in consumer electronics and personal computers cause these companies to delay some orders.”

Report cards from large companies to provide indications of profitability

These are ominous signs. And it’s likely that even more companies will be referencing the slowing economy in the coming weeks — some executives might even dare to use the R-word. Most of Corporate America operates on a calendar year schedule for earnings, which means they will report third-quarter results in October.

tech titans Apple (AAPL) and Microsoft (MSFT)streaming leader Netflix (NFLX)Consumer products faithful Coke (KO) and Procter & Gamble (PG)restaurant chains MC Donalds (MCD) and chipotle (CMG) and bank manager JPMorgan Chase (JPM) and Goldman Sachs (GS) are just some of the blue chips set to provide financial updates next month.

The change in mood was dramatic. According to FactSet estimates as of June 30, earnings for the third quarter were expected to rise nearly 10% year over year.

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But with companies and analysts lowering their forecasts, forecasts now call for just a 3.5% increase in earnings. That would be the worst quarter for earnings since a 5.7% decline in the third quarter of 2020 as the economy reeled from Covid-imposed lockdowns.

Home Depot's record sales show the US housing market is still strong

John Butters, senior earnings analyst at FactSet, noted that the magnitude of the change in earnings estimates is the largest since the second quarter of 2020, when many companies first went into shutdown mode.

Aggressive rate hikes by the Federal Reserve, which are expected to continue, with the Fed likely to raise rates significantly again later this week, are also fueling recession fears.
In addition, other global central banks including the European Central Bank and the Bank of England are also now in tightening mode. This increases the risk that a global rise in interest rates will lead to a further slowdown in profits, consumer spending and the broader economy.

“Sentiment and market momentum have turned decidedly negative,” said Mark Hackett, chief of investment research at Nationwide, in a report last week. “Profit fears have now come to the fore of investor attention alongside inflation and the Fed.”

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Hackett added that “growth expectations continue to weaken” and that CEOs and small businesses are increasingly concerned about a recession.

It’s worth noting that not all recessions are “great recessions” like 2008. The US economy had far more modest downturns in 1990 after oil prices skyrocketed during the first Gulf War, and in 2001 after the dot-com bubble burst. And the Covid recession of 2020 lasted just two months, the shortest downturn on record.

There is a possible bright spot. The US housing market is expected to slow despite concerns about rising prices and rising mortgage rates, but not the crash seen during the subprime crisis of 2007-2008.

Managers in companies like the construction machinery giant deer (EN)Home Improvement Retailer home depot (HD) and lowes (LOW) and device manufacturers jacuzzi (WHR)have admitted in conference calls that while a near-term weakening of housing demand is likely, another massive bursting of a bubble is not in sight.

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