Renowned economist Stephanie Pomboy has predicted that corporations will soon be beaten by an earning recession as many of them have not been able to pass high input costs to the inflation-tired public.
In her recent appearance on the financial solutions program “Wealthion,” Pomboy explained that a measure that she relies on as a proxy for corporate profit margins has plunged to lows they have not seen since the mid-1970s.
The finance expert said this profit proxy gauge basically plots the difference over time between two separate inflation measures: the Consumer Price Index and the Producer Price Index – or the consumer price inflation and business input cost inflation, respectively.
If the gauge dips into negative territory, it means that consumer price inflation is higher than producer price inflation, reflecting a situation in which businesses are absorbing part of the inflationary surge and taking a hit to their bottom lines.
“In the last year, we’ve seen a gap between the two of those that imply the most acute margin squeeze since the ’70s,” she stated.
Pomboy went on to describe the implications as an imminent “profit recession” for the country’s businesses. She added that Wall Street earnings forecasts will likely see precise downward revisions that would put pressure on the beat-up equity markets.
“It is not only forecasting a profit recession, it’s forecasting the worst profit recession in 50 years,” she said.
Wall Street analysts continue to project solid profit growth for businesses this year and the next, despite the fact that the profit proxy gauge implies a sharp plunge in the earnings.
According to Pomboy, finance analysts are estimating around five percent profit growth for the rest of 2022 for companies listed on the S&P 500, excluding energy. The forecasts are in the double-digits when it comes to firms in the consumer discretionary sector.
Consumer discretionary, or non-essential consumer spending, will likely be directly affected by the recent plummeting of consumer sentiment, the top indicator for spending of households.
She described consumer discretionary as the “point of maximum pain” and forecasted that the profit growth in this sector will remain at 24 percent for the current year and 38 percent in 2023.
“Calling these forecasts pies in the sky is to demean it enormously. Down 24 [percent] would be more like it,” she added.
Pomboy is the founder of MacroMavens, a firm that specializes in researching and recognizing emerging global economic trends and their implications for the financial industry.
Fed’s interest rate hikes hurt stocks
Analysts say an earnings recession would not be as bad as an actual recession. But for investors, it would not be much favorable, especially if the Federal Reserve continues to raise interest rates.
Pomboy forecasted that as earnings get downgraded, this will “cause more pain on the stock price” as assets have taken a beating in recent months.
Earlier this week, Fed made the most aggressive interest hike since 1994. The target rate range for the federal funds was recently raised by 75 basis points. Rates are again expected to rise by 50 or 75 basis points in July, which would bring the total increase to 2.00-2.25 percentage points this year.
“From the standpoint of our Congressional mandate to promote maximum employment and price stability, the current picture is plain to see: The labor market is extremely tight, and inflation is much too high,” Fed Chairman Jerome Powell said in a press conference after the Federal Open Market Committee meeting last week.
“During last May’s meeting, inflation has surprised to the upside, some indicators of inflation expectations have risen, and projections for inflation this year have been revised up notably,” Powell said to explain the reason why the committee decided to raise its policy rate by even more than the previously anticipated 50 basis points.
More hikes are coming and experts say that this is something that seemed unthinkable a few months ago. (Related: America is already hurtling toward a recession, warns economic analyst.)
Albert Edwards, Société Générale’s chief market strategist, said in a note that a market meltdown is imminent. “The Fed has, in an act of penance for allowing inflation to get out of control, donned a horse-hair shirt and is fully prepared to drive the U.S. economy into a recession,” Edwards said.
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