This week we came across an interesting relationship – both S&P Dow Jones and FactSet report earnings figures for S&P 500 companies. Most of the time the figures reported are very similar, if not the same. However, during economic recessions/slowdowns, the numbers tend to diverge. Why?
Piper Sandler Macro makes the key observation that the S&P Dow Jones includes “one-offs” while FactSet often excludes them. One-offs are simply one-time items (could be gains or losses) that are considered nonrecurring and, therefore, not part of the core business. Perhaps not surprisingly, during economic downturns negative one-offs increase. As a result, when FactSet begins to report meaningfully higher earnings figures than S&P Dow Jones because they are excluding those one-off items, it could be viewed as a signal of current/pending economic and earnings stress.
Today, the gap is $23 which is the largest since 2009. This is not to say we are predicting another financial crisis. However, it does support our view that the economy is very likely to slow further, the labor market is likely to weaken, and corporate earnings will continue to trend lower. We believe this combination will encourage more volatility in financial markets. With the S&P 500 down about 5% from its 2023 peak, perhaps investors are beginning to wake up to this reality.
Source: Piper Sandler Macro Research (as of 2/22/23)
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