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Earnings Watch: Executives seem pretty convinced a recession is coming, and earnings are expected to take a hit

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Executives detailing their second-quarter earnings talked about a recession more than they have since the last actual recession hit the U.S., and anxieties about an economic downturn are weighing on forecasts for the earnings season to come.

The word “recession” came up in the quarterly earnings calls of 240 S&P 500
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+0.84%

companies during earnings calls held between June 15 and Thursday, according to a FactSet analysis published Friday. That’s the highest number since at least 2010, FactSet Senior Earnings Analyst John Butters wrote, and it breaks a prior record of 212 that was hit during the first quarter of 2020, when COVID-19 anxieties descended on the economy.

Among the latest executives to call out a recession was RH
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+1.96%

CEO Gary Friedman, who said the word nearly a dozen times during the high-end furniture retailer’s earnings call on Thursday following its second-quarter results.

“People keep saying, are we going to be in a recession? We’re in a recession. Anybody who thinks we’re not in a recession is crazy,” he said. “The housing market is in a recession and it’s just getting started. So it’s probably going to be a difficult 12 to 18 months in our industry.”

Other pandemic-era earnings-call refrains were more frequent, the FactSet analysis found — 412 of the S&P 500 companies cited “inflation” during their second-quarter earnings calls, while 325 discussed “supply chain.” Those factors didn’t seem to have much of an effect on second-quarter results, however, as most S&P 500 companies reported second-quarter results that were better than expected. Butters reported that 75% of S&P 500 companies beat earnings expectations, and 70% topped sales forecasts.

But some analysts expect those second-quarter anxieties to spill over into results for the third quarter. Third-quarter earnings-per-share estimates have slipped 5.5% since June 30, Butters wrote. That’s the largest drop for a quarter since Q2 of 2020 and far ahead of the five-year average of 2.3%.

That change could stem from disappointing guidance. For the third quarter, 63 S&P 500 companies have issued negative earnings forecasts, FactSet said, while 40 issued positive forecasts.

“Analysts have been more pessimistic in their revisions to earnings estimates for S&P 500 companies for the third quarter compared to recent quarters, while companies have been slightly less pessimistic in their earnings outlooks for the third quarter compared to recent quarters,” Butters wrote in the report.

“However, both analysts and companies have been more pessimistic in terms of earnings expectations for Q3 compared to recent averages.”

This week in earnings

The call to put on your calendar: Oracle Corp.

Oracle
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+1.07%

laid off hundreds of staff last month, the Wall Street Journal reported, with most of the cuts landing in the software developer’s advertising and customer experience segment. The software company has yet to detail those layoffs, though, including no notice to the state of California’s Employment Development Department, as required by law. Expect some questions about cost cuts and layoffs in Oracle’s conference call following first-quarter results on Monday. The company in June completed a $28.3 billion acquisition of Cerner, whose software is used by hospitals and others in the health industry to examine patient data, and markets could get more clarity on whether further cuts are on the horizon.

The number to watch: Adobe Inc.’s forecast

Adobe
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reports fiscal third-quarter results on Thursday, but the numbers to watch will be in the financial forecasts from the digital-media design company amid concerns about weakening software demand. UBS analysts wrote last week that they heard from several Adobe partners and customers who described an environment marked by tighter budgets and “macro/spend pressures across both the Creative and Digital Experience segments.” The analysts said “a tough spending backdrop may take some zip out of the 4Q/Nov outlook” for the maker of software platforms like Photoshop and Illustrator.

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