Wall Street profits have silenced recession concerns

Companies are crushing earnings and fewer executives are talking about an economic downturn

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Happy Friday eve, investors.

Stocks are up, earnings look upbeat, and the case for the Fed to cut interest rates still isn’t strong.

All this is to say Wall Street doesn’t seem to be sweating a recession anymore.

What recession?

It seems like just yesterday a Wall Street analyst couldn’t open their mouth without saying “looming recession.”

As earnings season winds down, that chatter has all but evaporated. 

A banner stretch for corporate America has extinguished concerns of an economic downturn — even though inflation isn’t cooling as anticipated, rate cuts are up in the air, and the labor market remains tight. 

According to FactSet, S&P 500 companies have largely crushed it to start the year, with more than three-quarters of names beating expectations. 

Earnings per share (EPS) for S&P 500 companies are up 5.2% compared to a year ago, squarely above the consensus forecast of 3.4%.

If that holds, it would mark the strongest growth in roughly two years. 

To that point, the number of times the word “recession” came up on earnings calls and investor events has dropped from 302 a year ago to 100 this quarter, FactSet data shows. 

That also marks a two-year low.

Usually, analysts will cut earnings estimates during the first month of a quarter by paring what’s called a bottom-up EPS estimate — the aggregate median EPS estimate for all the companies in the index. 

Over the last decade, the average decline in this bottom-up EPS estimate has been 1.8%, per FactSet. 

And with hot economic data, geopolitical concerns, and an uncertain political cycle, it would make sense to predict a steeper dip than usual this year. 

Yet over the month of April, Wall Street forecasters actually raised this figure by 0.7%. 

Analysts haven’t raised the bottom-up EPS estimate during the first month of a quarter since the end of 2021, FactSet’s John Butters said in a note.  

Even more strange is that this upward revision happened while the S&P 500 index actually fell by more than 4%. 

So, here’s a weird April recap: 

  • Stocks plunged

  • Analysts turned more optimistic

  • Executives spoke less about a recession

The macro backdrop makes things even more confusing. 

The US is dealing with rising individual and corporate delinquencies, weak consumer sentiment, overseas tensions, and a central bank that can’t stamp out inflation.

But consumers keep spending, layoffs haven’t spiked, and economic growth is still chugging along. 

Just yesterday, Goldman Sachs, for one, raised its second-quarter GDP estimate from 3.3% to 3.4%. 

What does all this add up to? 

For Wall Street, cushier profits. 

*At a glance:

*Data as of Wednesday 8:45 p.m. ET

Elsewhere:

  • Shares of Arm plunged double-digits after hours. The semiconductor company gave a not-so-confident outlook for the fiscal year. It was met with a lukewarm reception from investors. (Bloomberg)

  • The EU agreed to arm Ukraine using profits from Russian assets. The bloc of countries plan to use roughly $3.22 billion in profits from Russia’s frozen state assets to buy weapons for Ukraine. (FT)

  • April saw the most corporate bankruptcies in a year. Companies are feeling the burden of high interest rates. Last month brought 66 new bankruptcy filings, up from 61 in March. (S&P Global)

Rapid-fire:

  • The US stalls its weapons shipment to Israel (WSJ)

  • Robinhood reported quarterly record revenue of $618 million, beating estimates (Barron’s)

  • “Bond King” Bill Gross says bond funds are now dead (Bill Gross’s website)

  • Home sellers are facing a summer from hell (Business Insider)

  • The rise of single-stock ETFs show the allure of leveraged risk (WSJ)

Last thing:

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