Torsten Sløk, Ph.D., Deutsche Bank Research:
We are experiencing a profit recession without an economic recession. This is not surprising given that the problems are very concentrated in the energy sector. Lower energy prices is bad for earnings in the energy sector and some of the industrial and materials sectors but good for the bottom line in all other sectors. In fact, the first chart below shows that despite oil prices having fallen for the past 15 months overall S&P500 profit margins are still trending higher as the profit losses in the energy sector are more than offset by increasing margins elsewhere, in particular in tech, healthcare, and consumer discretionary. Lower energy prices and a higher dollar are hurting certain parts of corporate America at the moment but with the China shock fading and the dollar and energy prices stabilizing it is becoming clearer that we are not about to enter an economic recession because the service sector – which makes up 85% of the US economy – is doing just fine, see the second chart below. Or put differently, to generate an economic recession we need a much more broad-based slowdown across companies and that is not what we are seeing and hearing in the anecdotes during this earnings season, including from Wal-Mart yesterday, which was a Wal-Mart specific story and not a consumer slowdown story (see also our WMT analyst Paul Trussel’s note on this).