First quarter earnings season kicked off on Friday with the start of the release of earnings reports from the major banks. These reports will be pored over by analysts looking for insights into any impact from the recent volatility across the banking sector, including the slow walk of deposits to money market funds. More broadly, as the rest of the corporate earnings filter through, they will be viewed as a key variable for economic growth, employment, and inflation.

In short, earnings for the first quarter of 2023 are expected to have fallen by 7.6% compared to the same quarter in the previous year. This would be the second consecutive quarter of negative earnings growth—a gauge that is crudely associated with an earnings recession. And, according to the latest I/B/E/S estimates, earnings are also expected to decline a further 6.1% in the second quarter.

As the first-quarter earnings season gets underway, inves­tors will be paying close attention to results about the impact from the recent banking crisis, as well as to what they might be telling us about the cyclical outlook.

If the economy is heading toward a recession, as seems likely, a glance at the past behavior of corporate profits around these downturns relative to current EPS esti­mates suggests that there is likely to be further down­side to earnings growth estimates in the coming months.

While there have been instances of price gouging in some areas as companies have taken advantage of price surges and have been slow to moderate their retail pric­es when wholesale prices have fallen—the food industry seemingly a prime example—selling prices overall only marginally outpaced unit labor costs since the pandemic. In fact, the markup ratio is still much lower than the peak dur­ing the previous expansion. Lastly, with margins already under greater pressure from a slowing economy, compa­nies will be further incentivized to lower headcount to prevent steeper declines.