The last month or two, we’ve seen a significant turnaround in the narrative surrounding the risk of recession in the US. Indeed, the level of positive economic surprises keeps rising, and signs from Q2 corporate reporting season have been better than expected.
Looking first at Q2 results from US companies, earnings per share (EPS) for S&P 500 stocks fell 4% year-on-year, much better than the 9% decline expected at the start of earnings season. Revenues grew 1% but were offset by 92 basis points of margin contraction. However margins remain historically high, as can be seen on the chart below.
The Consumer Discretionary sector posted the strongest earnings growth (+31%) while Energy profits fell the most (-51%). Excluding Energy, S&P 500 EPS growth and margins have improved for the last 2 quarters. Prospects are for EPS to be flat over the 2023 year, and experience around 5% growth in 2024.
What about corporate health? As illustrated by the following charts, although having peaked, net margins for large US corporates are at high levels compared to past decades, as are interest coverage ratios. Furthermore, while rising interest rates mean the debt burden on S&P 500 companies is rising, it remains very light compared with historical averages.
Source: Goldman Sachs
The final chart shows Goldman Sach’s view on the risk of recession in the US over the next 12 months – which in further good news has been reduced from 25% to 20%.
Source: Goldman Sachs
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