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Macroeconomic & Geopolitical

An Earnings Recession Now Built Into Consensus

28 June 2019 - 4 min read

The three things you need to know this week: Negative EPS growth for 2Q19 is now consensus, the CBO's bull and bear case for GDP given varying productivity assumptions and bank stress tests.

Overview

Earnings Recession?: In its latest report, FactSet now expects S&P 500 earnings to decline 2.6% in the second quarter. If this happens, it will be the first time the index has had two-consecutive quarters of Y/Y earnings drops since the first two quarters of 2016. Bloomberg shows that a similar 2.7% Y/Y earnings contraction for the S&P 500 is expected for the second quarter.

U.S. Budget: In the Congressional Budget Office’s latest long-term budget outlook, budget deficits over the next three decades are expected to push federal debt/GDP from 78% in 2019 to 144% by 2049 in their baseline scenario. The projections are highly sensitive to changes in inputs. If productivity growth was .5% lower each year than projected, debt/GDP would be 185% in 2049; if .5% higher, debt/GDP in that year would be 106%. Similarly, if interest rates were 1% higher each year than projected, debt/GDP would be 199% in 2049; if 1% lower, debt/GDP in that year would be 107%.

Bank Stress Tests: The latest Fed stress tests show the biggest banks in the U.S. have adequate reserves to lend in a severe economic downturn. Under the severely adverse scenario, these banks would lose an aggregate $410 billion, better than the last projection. Their common equity Tier 1 ratio would decline to 9.2% from 12.3% in December. If the second round of results are also positive, the big banks could get the green light to raise dividend payouts and increase share buybacks.

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