NEW YORK — Inflation tightened its grip on businesses and consumers in the second quarter, and investors expect to see a dent in the latest round of corporate earnings.
Wall Street was already expecting relatively subdued earnings growth in 2022 after a strong recovery in 2021, driven by pent-up consumer demand. Analysts, however, cut their already modest forecast for earnings growth in the April-June quarter.
Analysts now expect earnings for companies in the S&P 500 index to rise 4.4% for the period, down from their previous estimate of 5.8% they expected at the end of March. The companies warned investors of weaker results for the period at a higher than normal rate, according to FactSet.
Consumers have shifted their spending from goods to services, such as travel and restaurants, as they push past pandemic restrictions. That shift has turned into a broader pullback in spending as the prices of everything from food to clothing rise.
Russia’s invasion of Ukraine in February blindsided the global economy by deepening the disconnect between oil supply and demand, pushing gasoline prices to record highs.
Pain at the pump has been a key factor in pushing people to shift spending from discretionary items like electronics and utilities to more necessary items. Government reports over the past few months have shown that inflation remains stubbornly high while spending and consumer confidence are falling. Investors are increasingly concerned that the Federal Reserve’s attempt to temper rising inflation by aggressively raising interest rates could push the economy into a recession.
Fears of a recession weigh on the stock market. Every major index is significantly in the red for the year and the S&P 500 is in a bear market, that is, when it is down 20% or more from its most recent high in January.
Recession concerns and shifts in consumer sentiment and spending are manifesting in the sharp reversal in forecasts for retailers and other businesses that rely on direct consumer spending.
Analysts polled by FactSet had expected these companies, represented in the consumer discretionary sector of the S&P 500, to post earnings per share growth of 13.8% at the start of the second quarter. They now expect profits for these companies to fall by 9.3%.