Recession fears receded this earnings season

Earnings season Investors appear to have traded in their fleece vests for crystal balls — everyone on Wall Street seems to have a recession prediction. But lately, shouts of recession have become a bit quieter, and a growing group of economists say that any downturn will likely be mild.

So can the United States avoid a serious recession?

What’s happening:

As the third-quarter earnings season wraps up, it appears that CEOs may think so. They’re not mentioning the ‘R’ word as much as they once did: There has been a 26% decline in the number of S&P 500 companies citing the term “recession” on earnings calls for the third quarter relative to the second quarter, according to FactSet data.

The past month has brought with it a solid earnings season and a bevy of encouraging economic data that shows a slowing pace of inflation.

About 69% of S&P 500 companies beat earnings per share estimates for the third quarter, and 71% of S&P 500 companies beat revenue estimates, according to FactSet data. Those numbers are still below the 5-year and 10- year averages for S&P 500 companies, respectively, but they’re certainly not indicative of an economic meltdown.

Data reports this month also indicate the possibility of a Goldilocks situation where interest rates ease while consumer spending remains relatively strong. October’s softer-than-expected CPI and producer price reading showed that inflation eased across the board. Payroll data showed a moderation in wage growth and retail sales remained strong.

While CEOs are still feeling gloomy about the economic outlook, they’ve appeared to temper that gloom to a sustainable level where recession may no longer be top-of-mind.

CEO sentiment:

In June, JPMorgan CEO Jamie Dimon warned of an economic earnings season hurricane. But on Wednesday, JPMorgan economists Michael Feroli and Daniel Silver downgraded that threat. The United States will enter a “mild recession in the second half of 2023, they said. “We’re effectively looking for a Category 1 economic hurricane.”

Goldman Sachs analysts now predict that the United States will likely avoid recession altogether in 2023, though growth will slow.

The Conference Board’s October measure of CEO confidence, showed similar sentiment. While most CEOs are preparing for a recession over the next 12 to 18 months, 85% of executives expect that it will be a brief and shallow recession with limited global spillover.

“The narrative has been honed: if we fall into recession, it’s not going to be deep and dramatic. Earlier this year, CEOs were worried, markets were completely impaired and volatility was elevated because there was uncertainty about the looks of a potential recession,” said Jeffrey Roach, Chief Economist for LPL Financial. “The air has cleared up a bit, and recession uncertainty isn’t as pressing of an issue.”

The bottom line:

It’s all about the Fed. Investors are eagerly earnings season looking for clues about what Federal Reserve will decide during its December policy meeting and whether it will begin to wind down its fight against inflation by easing painful interest rates hikes.

Reports have shown that price increases are ebbing, but we’ve only seen one month of easing inflation data – that’s not enough to convince central bank officials of a downward trend. Analysts worry that if the economy remains strong, and central bankers over whether lower inflation is truly a trend, the Fed will overcorrect and push the United States into an unnecessary recession.

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