It’s too early to start worrying about the recession. Worrying about the revenue recession is another matter.

Economic downturns do not happen so often. Since 1948, there have been only a dozen, according to the National Economic Research Bureau’s Dating Committee (recognized as the arbiter of U.S. economic expansion and contraction), and they have become less common in recent decades. This does not mean that the country will not end up in another recession, but due to the fact that the Federal Reserve has only recently moved to tightening policies, as well as a strong labor market and good household balances, this may not happen soon.

The decline in revenue, which is usually defined as two consecutive quarters of corporate income below the previous year, is much more common than the economic downturn. According to the measurement of profit after taxes by the Ministry of Trade, since 1948 there have been 19 declines in revenue. List these earnings figures in real or adjusted for inflation, and the number of earnings declines will rise to 22. Not surprisingly, many of these earnings recessions have been due to poor stock market performance.

Analysts believe that the second quarter will be serious for earnings, but the failure will be only temporary. According to Refinitiv, for companies with the S&P 500 earnings per share in the second quarter will be 5.7% higher than the previous year. This is likely to leave them in the inflation-adjusted dimension. They then expect a rebound of growth, with profits rising 10.8% in the third quarter and 10.7% in the fourth.

But given the environment in which the S&P 500 operates, the earnings forecast could be much worse than analysts expect.

To begin with, it should be noted that the economy is slowing down from last year’s heady pace. In figures released Friday, economists polled by the Federal Reserve Bank of Philadelphia predict that gross domestic product will grow by 2.4% per annum over the past three quarters of this year, which is a decent but still big step in compared to last year. when it grew 5.5% in the quarter. This, in essence, is similar to the fact that sales of American companies in the domestic market will slow down – a development that, combined with a tough labor market that increases the cost of labor companies, can put pressure on profits.

The problem is exacerbated by the composition of the US economy. The pandemic has boosted drunken demand for commodities – a shift that has taken place right in the stock market as far more companies in the S&P 500 are engaged in the production and sale of commodities than in the economy as a whole. Companies like Netflix have also benefited from consumers who have stayed at home. But now that Covid-19 fears are easing, consumption is moving away from many pandemic categories and returning to services such as restaurants that are underrepresented in the stock market.

Meanwhile, the economic outlook in many countries where U.S. multinational corporations are making sales looks even better. Russia’s invasion of Ukraine is severely hampering the economies of many European countries. The big slowdown in China, where Beijing’s zero-tolerance strategy to combat Covid-19 has led to strong growth, is causing painful effects across Asia and beyond.

Moreover, the strengthening of the dollar could further damage the income of American companies abroad, as they are converted into fewer dollars than before. Compared with the currencies of other countries with developed economies, the dollar rose 12.6% over the previous year; it has declined from the previous level for most of 2021.

The decline in income will not be as bad as the real recession, but for investors it will not be much fun, especially if the Fed continues to raise rates. Until it becomes clear that incomes can really start growing again, the stock market may not be a very happy place.

Write Justin Lahart at justin.lahart@wsj.com

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