The global economy is showing warning signs that it could enter an earnings recession within the next few months, and the Federal Reserve looks less capable of sticking a soft landing.
After August inflation dipped but still hovered in above expectations, markets surrendered to their fears of an increasingly hawkish Fed, with predictions of a 75- to 100basis-point rate hike from central bankers coming this week. Concerns that the central bank could tip the economy into a recession caused the stock market to plunge last week.
The problem with an aggressive Fed is that it could cause the economy to go into recession. Many leading indicators of economic activity have started to decelerate, making a soft landing increasingly unlikely.
The leading economic index has an annual change of nine percentage points under the consumer price index. According to analysts, a difference of that caliber between the two is indicative of a recession.
The global purchasing managers' index fell to a negative reading in August, indicating that the economy is not growing as fast as it used to. According to the note, this is the first time since 2020 that the global Purchasing Managers' Index has dipped below 50.
"Earnings have proven resilient to the slowdown so far, but the increasing evidence of slowing growth means we should expect less-sanguine financial forecasts from business leaders during the coming third-quarter earnings season," it said.
Some companies are concerned about their earnings. FedEx's shares plummeted last week after the shipping giant said it would have a much lower profit in the third quarter.
Wall Street is divided on whether the stock market will fall or rise over the next few months. While more bullish analysts have suggested the market could rally to new highs before the end of the year, market bears have suggested stocks could fall as much as 20%.
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