U.S. corporate earnings are likely to slide into recession this year as the impact of business closures, stay-at-home orders and coronavirus infection rates chokes off demand and suffocates profits in the world's largest economy.
JPMorgan Chase (JPM) - Get Report kicks off the first quarter reporting season Tuesday, with big-bank rivals Morgan Stanley (MS) - Get Report, Goldman Sachs (GS) - Get Report and Citigroup (C) - Get Report following on Wednesday, after having warned of a "bad recession" in the United States and CEO Jamie Dimon suggesting he could suspend the stock's dividend in order to preserve capital in a "worst case scenario" downturn.
S&P 500 earnings, according to I/B/E/S data from Refinitiv, will slide 9% over the first quarter, from the same period last year, to a share-weighted $285.5 billion. The slump will then continue into the second quarter, when earnings will fall more than 20% from last year to $266.5 billion, cementing the first earnings recession -- defined by two consecutive quarters of profit contraction -- since 2016.
"We have run an extremely adverse scenario that assumes an even deeper contraction of gross domestic product, down as much as 35% in the second quarter and lasting through the end of the year, and with U.S. unemployment continuing to increase, peaking at 14% in the fourth quarter," Dimon detailed in his annual letter to shareholders last week.
Jobless claims alone suggest the unemployment tally could be even higher, after some 16 million filed for benefits over the past three weeks amid stay-at-home orders in nearly every state and the world's largest death toll from the coronavirus pandemic.
Still, with the bulk of the outbreak's impact hitting the U.S. economy over the final weeks of March, first quarter earnings aren't likely to reflect the extent of its damage. Tech sector earnings, in fact, are likely to rise 2.5% from last year, to around $60.4 billion, while communications services earnings are set to rise 7.4% to $31.6 billion.
Near-term forecasts, though, are likely to tell a very different story, and Dimon's suggestion of a 35% collapse in second quarter GDP was echoed by Pantheon Macroeconomics' Ian Shepherdson, who said a 30% slump was a "reasonable estimate, based on the very limited data so far and plausible assumptions about future trends."
"No one can have been much surprised at the record plunges in both consumer sentiment, reported by the University of Michigan survey, and small business confidence and activity, reported by the National Federation of Independent Business," he said. Both measures have further to fall, with the early 2009 lows likely to be revisited in their next iterations."
That means investors will be far more likely to key off second quarter and full years earnings forecasts than first quarter bottom line tallies.
How those forecasts match President Donald Trump' ambition to "re-start" the U.S. economy by next month's Memorial Day weekend will also likely prove crucial, as the longer the pandemics keeps businesses closed and workers at home, the largest the risk becomes that many of the millions of fired and furlough workers won't be rehired over the summer and autumn months.
Trillions in small and medium-sized business loans from the Federal Reserve, record low interest rates, a $2.3 trillion rescue package from Congress and many trillions more in liquidity support for Wall Street should provide the breathing space corporate America needs to navigate the final months of the pandemic, but the profit hit will be immense nonetheless.