Gluskin Sheff
- Top economist David Rosenberg has warned that corporate profits are shrinking.
- A decline in corporate profits could be a sign of an oncoming economic slump, and weigh on the stock market.
- The veteran economist told Insider last month he thinks a recession is only just starting.
Veteran economist David Rosenberg warned that corporate profits are shrinking, which doesn't bode well for stocks and is bad news for the US economy.
A slide in earnings could pull down stock prices, as shares are typically valued at a multiple to a company's profits, Rosenberg warned. It's also a classic sign of an oncoming economic downturn, as weakening corporate finances suggest demand is falling and growth is likely slowing.
"No recession? Well, there sure is one in corporate profits, with today's revised Q4 GDP report showing that pre-tax earnings collapsed at an -18% annual rate for the second straight quarter and contracting on a YoY basis for the first time since 2020 Q2," he tweeted on Thursday.
The Rosenberg Research president and former chief North American economist at Merrill Lynch thinks stocks had a dismal run in 2022 because investors assigned lower earnings multiples to equity valuations, as other assets became more attractive due to higher interest rates.
Demand for stocks typically falls as interest rates rise, as higher borrowing costs weigh on corporate finances and tend to have a negative impact on their future valuations.
Rosenberg told Insider last month that since he thinks a recession is only just starting, stocks could fall much more than they already have.
"If 2022 was about multiple contraction from nosebleed levels, 2023 is when interest rates percolate through the economy and into corporate earnings," he said at the time.
He was referring to a situation where higher rates would put a damper on spending, investing and hiring - and make it more expensive for companies to service their debts. Those impacts typically weigh on company profits and pull down stocks, particularly during a recession.
'The Big Short' investor Michael Burry has also warned in the past that he expects weak corporate earnings to pull markets lower.