U.S. economy heading into a major economic downturn? | The Financial Express

U.S. economy heading into a major economic downturn?

The overall corporate profitability picture emerging from the earnings season showed stability and resilience in key earnings drivers.

U.S. economy heading into a major economic downturn?
A big part of this year’s growth is thanks to the strong momentum in the Energy sector.

As can be seen from the most current figures, the US GDP growth is already declining. After declining by 1.6% in the first three months of the year, the US gross domestic product decreased by an annualized 0.9% in the second quarter.

As of now, the National Bureau of Economic Research’s analysts does not consider the US to be in a recession but many economists, analysts, and research experts are of the view that if not at present, the US may witness a recessionary scenario soon. Fed rate hikes are going to continue till inflation gets controlled which is likely to bring more pain to the economic conditions in the US.

Here is what Zacks Investment Research has to state about recession considering the corporate earnings that reflect the consumer demand across the sectors.

The overall corporate profitability picture emerging from the Q2 earnings season, with nearly all the results in, showed stability and resilience in key earnings drivers like consumer and business spending.

While this stability and resilience run contrary to worries of an imminent economic slowdown or even a recession, there are nevertheless early signs of weakness in both consumer and business spending.

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The market appreciated Walmart’s results, but the favorable market reaction likely had more to do with fears created by its earlier pre-announcement. The inventory overhang at Walmart, Target, and other retailers was mostly due to shifting consumer preferences. But part of the problem could be attributed to weakness in lower-income households as a result of inflationary pressures.

It makes intuitive sense for this consumer segment to be feeling some squeeze, as we heard from companies in a variety of industries, including AT&T. Other households seem to be doing just fine, as we heard from banks, credit card operators and beyond.

With respect to business spending, we have started seeing a squeeze on advertising budgets and hiring plans, but Microsoft and others didn’t see anything disconcerting with respect to spending on software and other services. That said, it is reasonable to expect some moderation in demand trends going forward as the full extent of the Fed’s tightening cycle permeates through the broader economy.

A slowdown has gotten underway, but there is nothing in the earnings data, management commentary or guidance that would suggest the U.S. economy heading into a major economic downturn.

That said, estimates have started coming down, with the overall revisions trend turning negative even after accounting for the persistent favorable revisions trend enjoyed by the Energy sector.

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If we look at the evolution of Q3 earnings growth expectations on an ex-Energy basis, the expected growth rate has dropped from +2.1% on July 6th to -5% today. A big part of this year’s growth is thanks to the strong momentum in the Energy sector whose earnings are on track to grow +137.6% this year.

Excluding this extraordinary Energy sector contribution, earnings growth for the rest of the index would be up only +0.3%. There is a rising degree of uncertainty about the outlook, reflecting a lack of macroeconomic visibility in a backdrop of Fed monetary policy tightening. The evolving earnings revisions trend will reflect this macro backdrop.

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