Recession fears are creeping into the U.S. corporate world, darkening the earnings outlook for S&P 500 companies.

That's according to a recent FactSet report, which closely monitors the financial information and conference calls of S&P 500 companies. It finds the highest number of S&P 500 companies mentioning recession in the second-quarter earnings calls in more than ten years.

"Of these companies, 240 cited the term 'recession' during their earnings calls for the second quarter, which is well above the 5-year average of 52," said John Butters, Vice President and Senior Research Analyst of the company, in a blog. "In fact, this is the highest number of S&P 500 companies citing "recession" on earnings calls going back to at least 2010 (using current index constituents going back in time). The previous record (since 2010) was 212, which occurred in Q1 2020 at the start of the COVID-19 pandemic."

The FactSet's findings come at a time when the U.S. economy is contracting, with the nation's real Gross Domestic Product GDP already falling for two consecutive quarters, a situation some observers call a recession. Thus, it should be no surprise that the most significant number of companies mentioning the world recession were in cyclical sectors like Financials (53) and Industrials (37).

In addition, many S&P 500 companies have significant exposure to overseas markets. Their revenues and earnings have suffered from slow overseas growth and the stronger dollar. Thus, the management of these companies may feel that the recession is already here.

Nonetheless, recession worries remain a secondary concern among S&P 500 companies to inflation and supply chain concerns, which have been around for much longer. For instance, 412 S&P 500 companies have mentioned "inflation" in Q2 earnings calls, and 325 companies have cited "supply chain" in Q2 conference calls.

Still, a slowing U.S. economy has prompted investment analysts to revise their earnings expectations for Q3. For instance, last July, FactSet found that analysts lowered EPS estimates for the third quarter by a more considerable margin than average. As a result, the Q3 bottom-up EPS estimate decreased by 2.5%, to $57.98 from $59.44, for the June 30 to July 28 period.

How does it compare to previous periods? "In a typical quarter, analysts usually reduce earnings estimates during the first month of a quarter," explains Butters. "During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.3%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.8%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.1%."

Traders work during the opening bell at the New York Stock Exchange (NYSE) on November 4, 2019 in a session that would produce records for the Dow, S&P 500 and Nasdaq
Traders work at the New York Stock Exchange (NYSE). AFP / Johannes EISELE
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