Tags: convergex | revenue | forecasts | recession

ConvergEx Strategist: Cuts in Revenue Forecasts Point to Recession

Monday, 23 July 2012 09:33 AM

Second-quarter earnings have come in largely as expected, although companies are cutting forecasts for the third and fourth quarters with such intensity that it appears a recession is about to strike the United States, according Nicholas Colas, chief market strategist at ConvergEx Group.

“Revenue estimates for the back half of 2012 have been slowly working their way lower this year,” Colas told CNBC.

“This trend, however, has accelerated to the downside over the past 30 days and we are fast approaching levels where these estimates are unambiguously pointing to the risk of a U.S./global recession later into 2012 and 2013,” he added.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Approximately 69 companies representing the S&P 500 index so far have beaten analyst forecasts for net profits; however, only 42 percent have beaten revenue market calls, suggesting that while companies can cut costs to turn a profit, demand for products and services is weakening, CNBC noted.

Stock prices have performed well this year, thanks to Federal Reserve intervention into the economy in recent years, namely by buying bonds held by banks, a monetary policy tool known as quantitative easing that pumps liquidity into the economy and encourages investing and hiring.

Such policies have kept the economy on life support.

“When corporations feel the pinch from a slower economy, they lay off workers,” Colas said. “When they lay off workers the Fed executes on its dual mandate and increases liquidity. And when the Fed increases liquidity, stocks go up.”

The U.S. economy grew 1.9 percent in the first quarter, below market forecasts by many and well beneath preliminary estimates of 2.2 percent.

The European debt crisis and a cooling Chinese economy has businesses on edge and fearful of expanding, and the arrival of a year-end “fiscal cliff”—a combination of expiring tax breaks and automatic spending cuts to government spending kicking in at the same time—has many worried the U.S. economy may be facing something a little more sinister than a mere soft patch.

“It’s about fear and uncertainty,” said Mike Collins, a bond-portfolio manager at Prudential Fixed Income, USA Today reported. “When corporations have uncertainty, they cut back hiring and they cut capital spending. It feels like that’s what’s happening.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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Monday, 23 July 2012 09:33 AM
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