A recession is here—but not that kind


While investors have been debating about an economic recession, an earnings recession has already settled in. We examine how this may play out.


April 13, 2023

Kelly Bogdanova
Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

How long will the earnings recession last?

Earnings projections continue to come down from COVID-stimulus, sugar-high levels.

With the Q1 reporting season about to begin in earnest, S&P 500 consensus forecasts from various sources anticipate this will be the third straight quarter-over-quarter decline in earnings and the second straight year-over-year decline in earnings growth. The latter would qualify as an earnings recession on Wall Street.

S&P 500 Q1 earnings are projected to drop 5.2 percent year over year, according to Refinitiv I/B/E/S, well below the 1.4 percent growth estimate at the beginning of the year.

The consensus forecast calls for earnings to trough in Q1 2023

S&P 500 quarterly earnings per share (dark blue are actual data; light blue are consensus estimates)

S&P 500 quarterly earnings per share

Column chart showing S&P 500 quarterly earnings per share from Q1 2021 through Q4 2023. Data from the start through Q4 2022 are actual results. Data for 2023 are consensus forecasts. In Q1 2021, S&P 500 earnings were approximately $49 per share. It rose each quarter to a peak of almost $58 per share in Q2 2022. In the two subsequent quarters it declined notably. For Q1 2023 the consensus forecast is for an additional decline to just under $51 per share. The consensus forecast then calls for earnings to increase in the next three quarters of this year, reaching a little over $58 in Q4, slightly higher than the previous peak.

Source – Refinitiv I/B/E/S; data as of 4/7/23. These data reflect the index’s historical point-in-time constituents and weightings at the end of each quarter for historical data, and current constituents and weightings for consensus estimates.

In our view, these trends shouldn’t be surprising given that the earnings peaks reached in the first half of 2022 occurred during the aftermath of billions of dollars in COVID-related stimulus. The federal government and Federal Reserve injected unprecedented amounts of cash and liquidity into the economy, and now the sugar rush has ended.

Also, last year, profits of some sectors benefited greatly from unusually high commodity prices during the onset of severe sanctions against Russia, the world’s largest commodity producer. Commodity prices have since receded from ultra-high levels.

While consensus forecasts currently signal that Q1 2023 could represent the trough in the quarterly earnings level and the year-over-year growth rate, we can’t rule out that the low point might happen later given the economic vulnerabilities.

We think consensus earnings forecasts for the remaining quarters of this year are bound to come down during the Q1 reporting season and in the months afterward. If this happens, S&P 500 profits and the year-over-year earnings growth rate could end up reaching their low points for this cycle in Q2 rather than Q1, and then could improve thereafter.

But if an economic recession materializes later this year or in early 2024, the earnings trough levels could be pushed back further, depending on the severity of the economic contraction and how and when the Fed would respond with interest rate cuts.

The consensus forecast calls for two more quarters of negative earnings growth

S&P 500 earnings growth year over year (dark blue are actual data; light blue are consensus estimates)

S&P 500 earnings growth year over year

Column chart showing the year-over-year percentage change in S&P 500 earnings growth from Q1 2022 through Q4 2023. Data for 2022 is actual; data for 2023 represents consensus estimates. Q1 2022 begins with 11.4% growth, and declines throughout the year until reaching -3.2% in Q4 2022. The Q1 2023 estimate is that it will decline further to -5.2%, and then start to improve but will remain negative in Q2 at -4.0%. Thereafter the consensus estimate is for 2.6% growth in Q3 and 10.2% growth in Q4 of 2023.

Source – Refinitiv I/B/E/S; data as of 4/7/23. These data measure y/y growth rates according to the index’s current constituents and weightings.

How deep will the retrenchment be?

The consensus 2023 S&P 500 earnings forecast has fallen to $220 per share from $252 per share last May. The bulk of the heavy lifting has already been done, in our assessment, but there is likely at least a little more to go.

Our national research correspondent anticipates full-year earnings will end up at $210 per share, when all is said and done. RBC Capital Markets, LLC Head of U.S. Equity Strategy Lori Calvasina is forecasting an even lower level of $200 per share.

Neither of those forecasts are factoring in a recession this year, although Calvasina’s estimate incorporates low year-over-year Real GDP growth of 0.8 percent for Q3 and just 0.2 percent for Q4 (both of those figures represent the consensus forecasts of Wall Street economists).

We think it’s prudent for investors to at least factor in the possibility of $200–$210 per share in earnings, especially when it comes to assessing the market’s valuation. Based on the April 12 closing price, the S&P 500’s price-to-earnings (P/E) ratio for the full year differs a lot depending on the earnings estimate:

  • $220/share = 18.6x P/E
  • $210/share = 19.5x P/E
  • $200/share = 20.5x P/E

In other words, the market’s valuation ranges from somewhat reasonable to elevated based on the earnings projection.

Importantly, what’s priced in?

The market usually factors in future earnings trends ahead of time—whether they are negative or positive.

One of the main reasons the S&P 500 stumbled last year, dropping 25.4 percent from peak to trough and 19.4 percent for the full year, is because the 2023 consensus earnings forecast declined meaningfully in the second half of the year. This is why we continue to believe that much of the bad earnings news has already been factored into stock prices.

Even if earnings estimates pull back further toward the $200–$210 per-share range, it seems to us that the market has already started preparing for this. For example, some institutional investors had been assuming roughly $205-$210 per share for 2023 within their earnings models as of late last year, according to RBC Capital Markets.

Certainly, the market’s path could be bumpy along the way toward a lower consensus forecast, with more volatility and/or downside. But even Calvasina, who is among the more cautious equity strategists on Wall Street regarding earnings estimates for this year, takes this scenario in stride.

In a recent report she wrote, “Do we think estimates need to come down a bit more? Yes, probably, and further downgrades to Financials earnings may do a lot of the work to get us there. Do we think that means the S&P 500 Index itself needs to make a new low? No, not unless the case for a deep recession or one that lingers well into 2024 starts to be made in earnest. Stock prices are discounting mechanisms and well-anticipated downgrades to EPS forecasts, on their own, are not enough to produce a new stock market low in our opinion, particularly since the pain baked into the stock market last year anticipated 2023 earnings trends that are even worse than our own below-consensus forecast.”

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

Kelly Bogdanova

Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

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