Wonder where the economy is heading? Pay close attention to earnings

Report cards from big companies to give clues about economy

These are ominous signs. And even more companies are likely to reference the slowing economy — some execs may even dare to use the R-word — in the coming weeks. Most of Corporate America operates on a calendar year schedule for earnings, which means they will report third quarter results in October.

The change in sentiment has been dramatic. According to estimates tracked by FactSet, as recently as June 30 earnings for the third quarter were expected to rise by nearly 10% from a year ago.

But as companies and analysts have cut their outlooks, forecasts now call for just a 3.5% profit increase. That would be the worst quarter for earnings since a 5.7% decrease in the third quarter of 2020, when the economy was reeling from Covid-imposed lockdowns.

FactSet senior earnings analyst John Butters noted that the magnitude of the change in earnings estimates is the biggest since the second quarter of 2020, which is when many companies first went into shutdown mode.

“Sentiment and market momentum have turned decidedly negative,” said Mark Hackett, chief of investment research at Nationwide, in a report last week. “Earnings fears have now joined inflation and the Fed at the front of mind of investors.”

Hackett added that “growth expectations continue to moderate” and that CEOs and small businesses are increasingly worrying about a recession.

There is one possible bright spot. The US housing market, despite concerns about surging prices and soaring mortgage rates, is expected to slow but not crash like it did during the subprime crisis of 2007 and 2008.