Fears of a Big Recession Are Fading on Wall Street

Companies are becoming less concerned about a potential recession impacting future earnings in 2023, according to data from FactSet.

The number of companies who are in the S&P 500 and cited a recession or slowdown as a concern declined for the third straight quarter, John Butters, a senior earnings analyst at FactSet wrote in a May 19 report.

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During the earnings calls of S&P 500 companies from March 15 through May 18, there were 107 companies that mentioned the term “recession” during a call for the first quarter.

While this number is “well above” the five-year average of 77 and the 10-year average of 59, that the word recession peaked during the second quarter, he said.

The number of S&P 500 companies that discussed a  recession on earnings calls for the first quarter of 2023 is 27% below the number during the fourth quarter in 2022 (147).

It is also 42% below the number in the third quarter of 2022 (184) and 55% below the number for the second quarter in 2022 (238). 

There are still 25 S&P 500 companies that have not reported earnings for the first quarter, so the final tally could be higher than 107. 

But the number still falls “short of the numbers from the previous three quarters,” Butters said.

Companies in the financials sector mentioned a recession the most, followed by the industrials sector. 

Recession Impact to Earnings 

Wall Street has remained optimistic about the odds of a potential recession or a slowdown in the economy.

Inflation rates have declined while the Federal Reserve is likely to stop raising interest rates after its 10th consecutive hike in May.

A recession could have a smaller impact to companies and their growth potential.

Louis Navellier, chief investment officer of Navellier Calculated Investing, said in his May 22 newsletter that “there seems to be growing confidence that even if a mild recession comes that it won’t hit earnings nearly as hard (down 10% to 20%) as historical recessions have.”

“Perhaps this is based on the dominance of mega techs weights in the indexes and the optimism of their AI opportunity,” he wrote. “Outside that short list of names, stock picking will become increasingly challenging if a recession comes.”

Companies have not discussed the pending debt ceiling deadline very often either. Only 13 S&P 500 companies mentioned the situation during earnings calls from March 15 through May 18.

But risks of a recession should not be ignored.

Bank of America said that the odds of one occurring within the next year are growing.

“Economists have been talking about recession risks for more than a year now and yet it never seems to arrive,” according to a research report. “Is it time to throw in the towel? .. not close .. consensus sees a 65% chance of a recession in the next 12 months, and [we] assume a similar probability.”

Bankruptcies Are Rising

The number of companies filing for bankruptcies have risen steadily.

Recent S&P data shows 2023 corporate bankruptcies increasing at an alarming rate since there have been 236 bankruptcies recorded through the end of April 2023, while 109 were recorded over the same time period last year.

Since the beginning of 2023, the odds of a recession occurring “has been the consensus forecast among economists, including our own at DB Research,“ Deutsche Bank analyst Henry Allen said

“Timing this is an important question for markets, since historically the S&P 500 does not usually bottom until the recession has begun,” he said. “Whilst a recession is yet to start, the amount of leading indicators pointing towards one have continued to grow this year.”

“And whilst nothing is inevitable, this cycle would need to behave very differently to all those seen before if a recession is to be avoided.”

Goldman Sachs has been  more optimistic about the outlook for the economy.

Jan Hatzius, Goldman’s chief economist, wrote earlier this month that the investment bank‘s U.S. growth forecast for 2023 “remains at a well-above-consensus 1.6% and our 12-month recession probability at a well-below-consensus 35%.”

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