Earnings Recession Coming As Fed Hikes Rates

An earnings recession is coming as the Fed hikes rates which accelerates an economic recession. Such should be no surprise given earnings are derived from economic activity.

However, despite economic growth already showing signs of weakness, inflation running at the highest level in 40-years, and the Fed moving aggressively to tighten monetary policy, Wall Street analysts continue to suggest strong profit margins and rising earnings into 2023.

The Fed raised interest rates last week by 75 basis points, the biggest increase since the mid-1990s, to curb inflation. The central bank indicated it would keep lifting rates, a strategy that will inevitably hurt the economy and the jobs market.

For the purposes of this article, we are defining an earnings recession as a period in which corporate earnings, or profits, are below the year-earlier level for two consecutive quarters. Using this measure, there have been 19 earnings recessions since 1948, with at least three instances in the past 10 years.

Over the long term, the economy grows at about 6%. Therefore, earnings growth also runs at roughly ~6% on a peak-to-peak basis. However, analysts suggest that earnings growth into 2023 will run well above the historical growth rate despite forecasts of much slower economic activity.

Earnings Recession, Earnings Recession Coming As Fed Hikes Rates

To put that into perspective, analysts’ estimates are currently at the most significant deviation above that 6% earnings growth trend.