Stocks staring down earnings recession fuel Wall Street clash

Bloomberg

The debate over the trajectory for corporate profits reached a crescendo this week, with two widely followed Wall Street strategists clashing over whether an earnings recession is
imminent.
Just days after Morgan Stanley’s Mike Wilson announced the S&P 500 profits would turn negative for the first six months of 2019, Brian Belski at BMO Capital Markets said such fears are “overblown.” At the argument’s core is the strength of an earnings machine that’s been underpinning the record 10-year bull market.
Based on the average of analysts estimates, US firms are on the cusp of suffering two consecutive quarters of profit declines, the common definition of a recession. Earnings will contract in the first quarter, and while a small increase is currently projected for the following period, that is likely to evaporate. Analysts have been lowering forecasts since the start of the year as companies continue to slash outlooks, citing everything from a stronger dollar to weaker demand in China and rising costs.
To Morgan Stanley’s Wilson, the earnings deterioration is so widespread that analysts probably won’t stop trimming their estimates until the expected growth rate turns negative for the entire first half. BMO’s Belski contends that while analysts are always too optimistic at the start of a year, applying past revision patterns to current estimates still don’t
predict a recession.
Based on the average analyst downward revisions over the last two decades, the expected growth rate for the four quarters of this year would be: negative 3.2 percent, positive 0.5 percent, negative 0.9 percent and positive 6.2 percent, data compiled by BMO’s data showed.
Hardly robust, but not bad enough to count as a recession. And should companies repeat their ritual of beating expectations, profits may end up rising, Belski says.
The forecast drop in first-quarter profit “has raised the fear quotient among investors with many now anticipating an earnings recession,” Belski wrote in a note this week. “From our lens, we remain constructive on earnings growth for 2019 and believe these lowered expectations could be setting up for a noticeable positive surprise.”