One of the well-established long leading indicators is corporate profits. Typically they peak a year or more before the onset of a recession. And the reason makes sense: if there is profit pressure that lasts longer than a single quarter, i.e., it looks like it may be forming a trend, firms might cut their output, and more importantly, they are much more likely to engage in cost-cutting measures including laying off employees.

Here’s the long term view (note graph in log scale), divided into two periods for easier viewing:

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Only in the oil related recessions of 1974 and 1991 did corporate profits not decline before their onset. Through Q2 of this year, profits were still rising. We won’t find out about Q3 officially until the end of November.

One way to try to get a more current handle on the profit situation is to track what firms are reporting to Wall Street. This is well-covered in the financial press. Weekly graphic updates are provided by, among others, FactSet.

Wall Street analysts’ profit estimates follow a predictable path. They are extremely optimistic in the quarters well ahead of the present. As the actual quarterly reports get closer and closer in time, those estimates are trimmed downward. The late financial analyist Jeff Miller studied this, and concluded that profit estimates were most accurate three quarters in advance. Further out they were too optimistic; closer in time they were too pessimistic.

The biggest time for downgrades in analysts’ estimates are right before the actual reporting begins. Then, when actual profits are reported, they beat those severely downgraded estimates, creating an atmosphere of investor optimism, and (during expansions!) it is off to the racetrack once again.

The typical pattern was followed in the weeks just prior to the Q3 2024 reporting season, which began a couple of weeks ago. In late September S&P 500 total earnings per share were estimated at 61.16:

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By two weeks ago, right before reporting began, they had declined to 60.63:

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By last Friday 1 in 7 companies in the S$P 500 had reported earnings for Q3. If this quarter followed form, actual reported earnings per share should be beating estimates sufficiently to cause actual plus estimated earnings to start to rise.

But that’s not what has happened this quarter so far. Instead, actual plus estimated earning per share have continued to decline, as of last Friday down to 60.07:

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That’s *not* typical at all. 

Of course, as the vast majority of companies report earnings over the next few weeks that decline could reverse sharply. But if the poor actual results persist, that’s a big negative for corporate expansion, including hiring, in the quarters ahead. 

One week from Thursday the first estimate of Q3 GDP will be reported. While it won’t include corporate profits, it will include a reasonable proxy in the form of proprietors’ income, which sometimes turns contemporaneously with profits and sometimes with a quarter or so lag. Here’s what that looks like, compared with corporate profits since the pandemic:

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In the meantime, we’ll get another weekly update from FactSet this Friday, and we’ll see if the downturn persists or reverses as more companies report.

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