Since corporate profits turned negative in mid-2015, Wall Street has pondered whether it’s just a passing phase or a signal of something worse. History strongly suggests the latter.
Recessions have followed consecutive quarters of earnings declines 81 percent of the time, according to an analysis from JPMorgan Chase strategists, who said they combed through 115 years of records for their findings.
The news gets worse: Of the remaining 19 percent of the time, recession was only avoided through either monetary or fiscal stimulus. With the Federal Reserve holding limited easing options and a deeply dysfunctional Washington thwarting a fiscal boost, the prospects for help are not good.
The warning comes amid a stock market hovering around correction territory and a mixed economic picture. Citigroup this week warned of escalating risks for a global recession, though data Thursday on durable goods orders suggested the manufacturing sector may be shaking off a contraction phase. Fed officials in recent days have been talking down recession risks.
“Absent a pickup in consumption and further weakening in the U.S. dollar, we continue to see rising risk of earnings recession in the U.S.” JPMorgan’s equity strategy team said in a note to clients.
Worse, future estimates are declining, indicating the damage won’t end until at least the third quarter of 2016. First-quarter profits are likely to fall 6.5 percent, while the second quarter is expected to show a 1.1 percent drop, according to FactSet. Sales already are well into recession territory, with four consecutive quarterly declines.
Despite the mounting problems, JPMorgan still only assigns a one-third chance of recession this year, though the probability seems to be rising. The firm said its Qualitative Macro Index measuring business conditions shows “a cycle that remains in contraction (weak and decelerating) over the coming months.”
Full article: Recession sign is in play and has 81% accuracy (CNBC)