A leading indicator of recessions, U.S. corporate earnings, will likely continue to weaken through 2023, says Fitch Ratings.
In a new report, the rating agency said that previous downturns have been preceded by, on average, four quarters of declining corporate profits.
“The peak-to-trough decline in after-tax profits during the last 12 recessions averaged 19%, with revenue and margin declines varying across sectors,” it said.
In the second quarter, profit growth for the constituents of the S&P 1500 Index “softened a bit,” Fitch said, noting that 40% of companies revised their earnings guidance down.
“Downward revisions to consensus expectations for 2023 have been slow, but will likely accelerate as monetary tightening continues in order to reduce inflation and economic growth slows,” it said.
The impact of these trends on corporate credit ratings will largely depend on the level of pressure on cash flows for individual companies, and the headroom within their existing ratings, the report noted.
“An economic downturn that adversely affects demand and pricing power could reduce rating headroom, with challenges amplified if inflation stays high,” it said. “An aggressive financial strategy, such as debt-financed share repurchases, while cash flow is pressured could be the impetus for negative rating actions.”