Recent comments by Societe Generale's (EPA: GLE) renowned and constantly bearish economist Albert Edwards regarding "falling revenues and falling margins" amongst US companies has made headlines overseas, but largely gone unreported here in Australia. Perhaps this is because closer to home economists are concerned Australia itself may be headed for recession and worries surrounding a slowing Chinese economy are ringing alarm bells too.
Edwards in his most recent publications highlights some interesting data to back up his worries that the US faces a recession soon. In a note titled "Has the US recession already begun?" Edwards draws readers' attention to two important points.
Firstly, the quarter just ended in the USA saw nearly 20% of the companies in the S&P 500 issue negative earnings per share (eps) revisions. In contrast just 2.6% issued positive eps upgrades. As Reuters states "if this persists it would be a record pace of downgrading ahead of a reporting round."
Secondly, Edwards reminded readers of his belief that profit margins mean revert. US market followers will be aware that many US corporations have been earning record profits over the past few years, a somewhat perverse or ironic quirk resulting from the quantitative easing money printing. Edwards reminds readers that 'over-earning' by firms won't last and in his opinion, profit margins will come down sooner rather than later.
Back here in Australia, we have become used to the almost daily downgrade of earnings expectations. Whilst largely concentrated within the mining services and resource sector — for example Emeco Holdings (ASX: EHL) — downgrades outside these sectors, including AMP (ASX: AMP) in financial services and APN News & Media (ASX: APN) in the media sector are also occurring.
Foolish takeaway
Just before former Prime Minister Gillard left office she was chastising economists and market commentators for talking down the economy. With so many earnings downgrades occurring both domestically and overseas, investors should have reasonable cause to be alert (if not alarmed) by the potential for a recession.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
