Don't get fooled, corporations are still in recession

With earnings season wrapping up, now is as good a time as any to take a bird's eye view of the health of US corporations.

After disastrous expectations from analysts, 71% of S&P 500 companies who have reported their quarterly earnings thus far have beat consensus projections for profits (about 87% of the S&P 500 have reported as of Sunday).

However, in spite of the beats, companies are still in a profit recession.

Defined as two or more quarters of negative earnings growth, we are now three quarters deep into this corporate-specific recession. Profits dropped by 7.1% for S&P 500 companies year-over-year for the first quarter.

"Global corporate earnings are in recession now although they are not yet falling as fast as they do during US economic recessions," wrote Jan Loeys, global strategist at JPMorgan.

Based on on Loeys' analysis, it does not appear that it is easing up any time soon.

"Past episodes where soft US earnings reversed course saw either strong fiscal or monetary stimulus or strong growth in productivity," wrote Loeys in a note to clients.

"With central banks having much less to give today, fiscal policy neutral, and productivity falling, it much harder to expect higher company earnings over the next year."

Loeys' isn't overly worried about this, despite the fact that in almost every occasion such a profit drawdown corresponds with the dramatic policy action he outlines above or a broader, economy-wide recession.

"Falling profit margins have been the important warning signal and cause of an eventual US recession and we thus continue to see an elevated risk of such a contraction over the next 1-2 years, even as the immediate risk appears low," wrote Loeys.

On the more bearish slant is Andrew Lapthorne, head of quantitative strategy at Societe Generale. To him this profit downturn is a sign that stocks are far too overvalued and the economy is weaker than you think.

"MSCI World EPS is now declining at the fastest pace since 2009, losing 4% in the last couple of months alone (this despite stronger oil prices)," wrote Lapthorne in a note. For the S&P 500 specifically, the year on year drop in profit drop was the most since third quarter of 2009.

"Global earnings are now 14% off the peak set in August 2014 and back to where they stood five years ago. Equity prices on the other hand are 25% higher. Gravity beckons!"

Lapthorne also noted in a later note that even stripping out the dismal energy sector MSCI profits are down 1% from peak. Stripping out both outliers to the upside (financials) and downside (as we mentioned, energy) profits are down 5% from peak.

So yes, corporations hopped over a monumentally low bar in the first quarter of 2016, but that doesn't mean their troubles are ending. What that means for the broader economy and stocks is up for debate. It could be just a slowdown, or a signal of a nearing recession depending on how you look at it.

Either way, as profits stand now, it isn't pretty.