Earnings of American Companies in Recession – Falling for the Second Consecutive Quarter?

The season for the announcement of business results of American companies for the fourth quarter, which will begin this week, could show that earnings are in recession, meaning they have fallen for the second consecutive quarter.

In a Reuters survey, analysts estimate that in the last quarter of last year, earnings of companies in the S&P 500 index, the most important stock index on Wall Street, fell by 4.2 percent compared to the same period of the previous year. A decline in company revenues is also expected, by 3.2 percent year-on-year.

According to data from the U.S. Department of Commerce, in the third quarter, the profit of American companies – adjusted for inventories and depreciation – amounted to about $2.1 trillion, što is 1.1 percent less than in the previous quarter and 4.7 percent less than in the third quarter of 2014.

This was the largest annual decline in earnings since the second quarter of 2009 and only the second decline since the recession of the U.S. economy ended in mid-2009.

According to estimates by analysts in the Reuters survey, the decline in profits of companies in the S&P 500 index continued in the fourth quarter of last year, threatening an ‘earnings recession’, similar to the economic recession, or a decline in gross domestic product (GDP) for two consecutive quarters.

Ahead of the quarterly earnings announcement season, 85 companies in the S&P 500 index have lowered their earnings estimates below analysts’ expectations, while 26 have raised their estimates.

Given the sharp decline in oil prices over the past year, the largest drop in profits is expected in the oil sector.

Due to the weakness of the Chinese economy, the world’s largest consumer of raw materials, commodity prices have also sharply fallen, leading to a double-digit decline in earnings expected in the mining sector.

The high exchange rate of the dollar will also significantly impact the operations of American companies, as companies in the S&P 500 index generate almost half of their sales abroad.

The strengthening of the dollar negatively affects American companies operating abroad because it makes their products more expensive and less competitive, leading to expected declines in their revenues and earnings.

The value of the dollar against a basket of six major world currencies rose by 9 percent last year, a result of the Federal Reserve’s interest rate hikes, while, for example, Japanese and European monetary authorities will continue to pursue extremely loose policies for a longer time.

However, it should be noted that analysts usually set earnings and revenue estimates very low. This way, they allow companies to more easily exceed expectations, thus opening up space for the growth of their stock prices.

Therefore, it is necessary to wait for the end of the quarterly earnings announcement season to see if the earnings of American companies in the past quarter have indeed fallen.

However, when the last business report for the fourth quarter of last year is published, the results could show that the earnings of companies recorded a zero growth rate for the entire previous year, according to the Reuters survey.

In 2016, earnings could, according to analysts’ estimates, increase by 7.5 percent year-on-year. However, these estimates have also been reduced, as analysts expected a 10.3 percent growth in profits of companies in the S&P 500 index for this year in the Reuters survey on October 1.