The dents in global economic growth are growing more visible and fallout from financial-market tension is lingering—potentially indicating that while the US is making some progress in its inflation fight, the Federal Reserve is still expected to hike rates again next month. As Q1 earnings season from US corporations gets underway, it is important to bear in mind that earnings for S&P 500 companies are expected to have declined 4.8% Y/Y in the first quarter, marking the second consecutive drop in year-over-year earnings growth. That would translate into the first “earnings recession” since the pandemic.

One key takeaway from the banks and the lending institutions that have reported Q1 earnings so far – The four biggest US lenders wrote off a combined $3.4 billion in bad consumer loans in the first three months of 2023, a 73% increase from a year earlier. While inflation has declined this year, the damage has been already done – consumers are turning to buy-now, pay-later apps for everyday items.

Future Wealth’s View

The bottom line is that the economy looks to be stalling and there’s softening in the labor market as well as housing. The deterioration in consumer spending happens in the three stages – the first phase is when the consumer spends with wild abandon, flush with cash (aided by free money from the government). The second phase is when the consumer goes split-brained – one side of the brain says to budget and save while the other side continues to throw money at expensive dinners, concerts and vacations funded by increasing credit card debt. The final phase happens during a recession – layoffs, credit card bills going unpaid and home foreclosures eventually screeches consumer spending to a halt. We, at Future Wealth LLC, believe that we are now in phase 2 and the second half of 2023 will usher in phase 3.

Next week will bring a flood of earnings, including from some of the mega cap companies including Microsoft, Amazon and Alphabet whose shares have helped the S&P to rally so far this year. These companies will provide further clarity on the enterprise and consumer spending patterns going into summer. If anyone knows which way the market will react following their results, we are all ears.