The Earnings Recession Could End Soon. Now What?

A run of shrinking quarterly profits may finally end soon, but it's probably not time to break out the champagne just yet.

The recession in corporate earnings could end with the coming third-quarter reporting season—but will that be enough to lift the stock market from its late-summer slumber?

An "earnings recession" occurs when corporate profits decline on an annual basis for two straight quarters. As of the end of second quarter, average quarterly earnings for companies on the S&P 500® Index had declined for three quarters in a row.1

Analysts polled by FactSet now expect average earnings to have shrunk just 0.3% in the third quarter from a year earlier, before accelerating to a 7.8% expansion in the fourth quarter.2 (The firm issues a new estimate each Friday ahead of and during earnings season, so this could change.) They're also forecasting 12.2% calendar-year growth in 2024, which would be a big step up from this year's anemic forecast of a 0.9% calendar-year rise.

"Whether or not forward earnings estimates are too optimistic remains to be seen. However, they might not seem realistic this time, given the expected coming impacts from tighter Fed policy and a slowing global economy," says Schwab Senior Investment Strategist Kevin Gordon. "Companies will have to demonstrate durable recoveries in demand, as opposed to boosting earnings solely via cost cutting."

So, what's going on here?