The reporting season in the USA has concluded, and it's time to assess the situation. The results are weak, indicating the potential approach of a recession, despite the persistently unrealistic optimistic forecasts.
Actual Business State
The degree of alignment between the reports and analysts' predictions is inconsequential – that information holds no value whatsoever. The only relevant factor is the actual state of business affairs.
Operating profits of companies have experienced a 5.2% year-over-year decline, with a clear trend of accelerating deterioration. In Q2 2023, the decline is -3% YoY, in Q4 2022, it's -1.9% YoY, while Q3 2022 saw a growth of 5.4%. Additionally, the profit increased by 10.6% YoY in Q2 2022.
Historical Significance of Profit Declines
We are witnessing the third consecutive quarter of profit decline, which has only happened three times in the past 20 years: during the 2008 - 2009 crisis for nine consecutive quarters, during the 2015 - 2016 recession from Q3 2015 to Q2 2016 (four quarters), and in the COVID crisis from Q1 to Q3 2020.
For the first time in the entire history of the American market, the most aggressive market rally was observed (25% growth since October 2022) amidst a backdrop of falling profits, even at the onset of a recession.
Contextualizing Profit Decrease
A 5.2% decrease in profit lacks informative value without retrospection. To be equitable, the profit is declining from a high baseline.
When comparing Q2 2023 to Q2 2021, there is growth within 5%. In comparison to the pre-pandemic Q2 2019, there's a significant increase of 46%. When compared to Q2 2013, there's a growth of 125% amidst a 190% market growth, and compared to the pre-crisis Q2 2008, there's a growth of 163% amidst a 230% market growth.
The present well-balanced evaluation of the S&P 500 index, based on historical averages of various multiples (including debt considerations), stands between 3600 - 3800 points, assuming no recession risk and the maintenance of the current profit level.
The adjusted market evaluation, factoring in a composition of risk elements (realistic recession risk, profit declines, and the realization of a debt crisis), and accounting for the cost of alternative financial instruments (debt and money markets), stands at 2900 - 3200.
The main contributor to profit growth since 2019 has been the IT sector.
Conclusion
In conclusion, the end of the US reporting season has shed light on a complex and potentially troubling economic landscape. The pronounced weakness of the results serves as a stark indicator casting the shadow of an impending recession. The juxtaposition of these results against a backdrop of consistently optimistic forecasts underscores the need for a more pragmatic assessment of the situation.