Earnings season view: Recession looms large

Over the first quarter, equity markets had to face the fickle nature of investors: the move from a goldilocks scenario to a no-landing, to the final conclusion that recession is the most likely outcome. As this earnings season kicks off, the focus will be on finding clues as to the potential impact of the slowdown. This will allow investors to re-assess each company's fundamentals in light of this new environment, providing key guidance as to its long-term performance.

Our key assumptions are:

Consumption

Economists are scrutinizing the health of the consumer to determine how deep the impending recession could be. So far, customers have generally been able to stomach higher prices as companies try to pass on elevated costs but the picture could change with different segments of the market faring better than others:

Technology

Unlike last year, despite the volatile market environment, the technology sector managed to regain its credentials in the heart of investors, on the back of cost-cutting measures, the disinflation trend, and lower rate expectations.

To understand if outperformance can last, several elements can be watched: 

Tech companies were quick to mention the first signs of economic slowdown. During last quarter’s earnings season, several tech companies like Amazon, Microsoft, and Google mentioned a slowdown in IT spending as they sought to optimize their cost structures in order to face a weakening macro backdrop. Alphabet and Apple also warned about a slowdown in consumer spending and advertising. Therefore, earnings expectations came down a lot, leaving room for positive surprises.