S&P 500 companies could see the smallest earnings growth in 2 years as recession chatter from corporate execs reaches highest in a decade

• Wall Street analysts have been cutting S&P 500 earnings estimates as executives ramp up recession talk.
• FactSet said 240 companies cited recession in second quarter calls compared with the five-year average of 52.

Wall Street analysts have been chopping down third-quarter earnings estimates for S&P 500 companies as executives have increasingly discussed potential recession risks, leading investors to face what could be the smallest rate of profit growth since the COVID-19 pandemic was still unfolding.

The moves are taking place given the rise in S&P 500 companies that have cited "recession" on second-quarter earnings calls, FactSet senior earnings analyst John Butters said in a weekly update published Friday. There were 240 index companies that mentioned recession on earnings calls held between June 15 through September 8, much higher than the five-year average of 52 and the highest number running back to at least 2010.

Such talk has picked up as government data showed the world's largest economy contracted in both the first and second quarters of 2022 as well as ongoing concerns the Federal Reserve's aggressive rate hikes this year to cool inflation will lead economic activity to shrink.

The financial and industrial sectors have the highest number of companies that cited recession on earnings calls, at 53 and 37 respectively.

The estimated earnings growth rate for the S&P 500 stood at 3.7%. If realized, that would be the lowest growth reported by the index since the third quarter of 2020, just a few months after the COVID outbreak was declared a pandemic, prompting massive lockdowns and government stimulus measures in the US and worldwide.

Analysts since June 30 have pulled back earnings estimates by 5.5%, outstripping the 5-year average of 2.3%.

Four of the 11 sectors that make up the S&P 500 are expected to post third-quarter earnings growth, led by the energy and industrial sectors, while seven sectors looked on track to post declines in profit, led by the communication services and financials sectors.

This year's jump in oil prices has benefitted the energy group. Valero Energy, Marathon Petroleum, Phillips 66, and Exxon Mobil have been the largest contributors to the increase in estimated, or dollar-level, earnings for the energy sector since June 30, according to FactSet.