Strong company earnings show US recession fears are overblown, Goldman Sachs says
US companies' strong second-quarter earnings suggest that fears of recession overblown, according to analysts at Goldman Sachs.
The investment bank said S&P 500 companies increased their earnings 9% year-on-year on average in the second quarter, with nearly three-quarters of the index's market capitalization having reported. It said revenues have grown in every sector.
The US economy contracted for two consecutive quarters, data showed last week, fulfilling the criteria for one common definition of a recession.
Meanwhile, CEO and consumer confidence has collapsed as the Federal Reserve rapidly increases borrowing costs in an effort to cool red-hot inflation, driving fears that the US economy is going backwards.
Yet "corporate financial results and management guidance indicate otherwise," Goldman Sachs analysts, including chief economist Jan Hatzius, said in a note on Monday.
Revenues will continue to grow in the third quarter, if company guidance is to be believed, Goldman Sachs said. Companies also look as if they're going to increase investment slightly, rather than cut it.
Goldman also said there are signs that the rise in wages — which has been contributing to inflation — is peaking. Only one out of the 88 Dow Jones companies that mentioned the labor market in their earnings reports said shortages were getting worse, while 35 said they were easing.
The bank said progress on inflation appears more mixed, however. It said its index that tracks company price announcements has stopped rising for the first time in eight quarters but is still at record highs.
"Thus far, Q2 earnings season has by and large been better than feared. S&P 500 earnings increased 9% year-on-year on 16% revenue growth," Goldman's analysts wrote.
Hatzius and colleagues said this backdrop will allow the Fed to keep hiking interest rates without worrying too much about the economy. But they said they expect the pace of rate hikes to slow, after the second 75 basis point increase in two months last week.