Stocks are in an earnings recession and a downturn could sneak up on the economy this quarter, economist David Rosenberg says

• Stocks are in an earnings recession and pressure on profits will continue, David Rosenberg said.
• The economist pointed to the contraction in corporate profits, despite earnings beats in the last quarter.

Despite a seemingly strong first-quarter performance, stocks are still battling corporate earnings pressures, and a recession could easily sneak up on the economy in the coming months, top economist David Rosenberg warned.

"We are in an earnings recession, full-stop, and it's not over yet," Rosenberg said in an interview with CNBC on Thursday, pointing to positive investor sentiment after corporations posted strong financials over the first quarter.

But that's largely due to earnings expectations being downgraded over the previous year, Rosenberg said, which has created a false sense of strength in the market. In reality, corporate earnings have been struggling and will continue to face pressure, he warned.

"Estimates, it's the game that Wall Street has been playing I think since I started the business. Lower the estimates, so that you can jump over the low bar, and all of a sudden, voila, even in the context of an outright earnings contraction, what do you know, almost 80% of companies are beating their estimates," he said. "I just don't know why more people don't roll their eyes at the beats."

Stocks have faced pressure over the past year as rising inflation and aggressive Fed rate hikes weighed heavily on the market. Central bankers just issued their 10th rate hike to combat inflation last week, with experts warning that policymakers risk tipping the economy into a recession.

Though a recession hasn't been officially declared, investors shouldn't be surprised if one sneaks up on the economy, Rosenberg said. In a recent note, he said recessions since World War II have typically started fifteen months after the Fed's first rate hike.

As the Fed first began to raise rates in March 2022, that suggests a recession will start this quarter, Rosenberg predicted. His view is in line with what other commentators have forecasted, with Bank of America and Pantheon Macroeconomics also predicting a downturn to strike within the next few months.

"Recessions are like this odorless gas. They catch up on you," he warned.