Profit recession: This is what you need to know

The suddenly dour forecast for corporate profits in 2015 is accompanying fears that a recession will be close behind.

In fact, the two have gone pretty much hand in hand over the years, which is why a looming earnings pullback in corporate America has sparked concern on Wall Street. Since the end of World War II in 1945, each of the 10 economic recessions has been accompanied by a decline in earnings growth.

Only three times during that period did negative earnings not see a recession follow, according to Sam Stovall, chief equity strategist at S&P Capital IQ.

"While not an official profit recession, as no contraction in EPS growth is currently projected, the full-year growth estimate is getting uncomfortably close to that threshold," Stovall said in a note to clients this week. "And like the recognizable pair of Astaire and Rodgers, downward EPS growth trends and economic recessions also go hand-in-hand."

Whether this is, in fact, a profit recession is in the eye of the beholder and will be determined more fully once first-quarter earnings start rolling in. The early projections are not good.

Projections, though, are just that—estimates, which, historically speaking, generally undershoot actual growth by a substantial margin.

S&P Capital IQ expects the first quarter to show a loss of 2.92 percent for the S&P 500. Current expectations for the second quarter see a loss of 1.84 percent.

In conventional economic terms, two consecutive negative quarters generally constitute a recession. Stovall's point is that the full-year estimate is still positive, but by just 0.3 percent.

Read MoreProfit recession leads to 'recession recession'

The sheer magnitude of the decline in expectations is striking: As recently as Dec. 1, estimates for the first quarter were for a gain of 8.57 percent, with the second quarter projected at 7.33 percent and the full year at 9.78 percent.

The primary culprit has been the sharp drop in oil prices, which are down 49 percent over the past six months. Consequently, energy profits are forecast to tumble 62.51 percent in Q1 and about the same in Q2, with the full-year sector drop pegged at 57.08 percent.

But it's not all energy. Utilities, materials, telecoms and consumer staples are all projected negative for the first quarter. In the second quarter, though, energy is the only one of the 10 S&P 500 sectors where the forecast is a profit drop.

The profit cliff

Sector
Q1 Estimate (%)
Outlook on Dec. 1
Discretionary 7.63 16.3
Staples -0.69 6.19
Energy -62.52 -13.82
Financials 11.71 19.07
Healthcare 9.13 13.18
Industrials 3.8 10.94
Info tech 4.26 10.44
Materials -4.45 14.86
Telecom -2.71 1.83
Utilities -2.92 -7.93
S&P 500 -2.92 8.57
Source: S&P Capital IQ

"They always say investing is as much an art form as it is a science," said Quincy Krosby, market strategist for Prudential Financial. "With earnings and top-line revenue growth (down), more sectors than just energy are starting to pull back. The market participants then start wondering if we are scheduled for some kind of important economic slowdown."

Recent economic signals point if not to a recession than at least growth in the early part of the year well below expectations.

The Federal Reserve last week cut its full-year gross domestic growth forecast to a maximum of 2.7 percent from 3 percent. For the first quarter, most economists have trimmed their outlooks, with Morgan Stanley recently slashing its Q1 forecast to flat. The Atlanta Fed's GDPNow tracker sees Q1 up just 0.3 percent.

In addition to tumbling oil prices, firms have been hit by a stronger U.S. dollar, buoyed by expected rate hikes from the Fed and looser monetary policy from its counterparts around the world.

The question for markets is how much that will hurt stock prices.

The S&P 500 has had a wobbly year while profits declined, with the broad index up just 2 percent. On a sector level, health-care stocks have kept the index positive, with an 8.8 percent gain, while consumer discretionary is up 6 percent. Utilities have been the biggest weight, declining 5.7 percent, while energy is off 4.4 percent and financials are down 1.1 percent.

Sentiment generally remains bullish among Wall Street pros, with Stifel Nicolaus on Tuesday projecting a 2,350 S&P 500 target for the full year—an 11 percent or so gain from current levels. Mom-and-pop participants, though, are not as confident, with the American Association of Individual Investors survey last week showing bullishness at 27.2 percent, the worst reading in nearly two years.

There are two important caveats to keep in mind, though, despite all the pessimism: Analyst earnings estimates are almost always on the low side, and should a recession actually hit the chance of the Fed raising rates from near-zero is, well, essentially zero.

Read MoreAn eighth of a point Fed rate hike?Seriously?

"Much lower growth is ahead," said Nick Raich, CEO of The Earnings Scout. "But, while a (first-half) 2015 earnings recession is expected, it is not likely at this point. Thank all the central banks for that."