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Will the US ‘earnings recession’ end soon?

Fluctuation in the market
Hiroshi Watanabe | Getty Images

Earnings growth in the U.S. might have been a little lackluster in the last year, but one strategist has told CNBC that the country's economy is "clearly" not heading into a recession.

"The U.S. has put in a great period of earnings growth … in contrast to Europe," Nick Nelson, head of European equity strategy at UBS told CNBC Monday.

"From 2009 through to early last year, it was compounding at 7 percent per annum which is pretty steady."

However, he conceded that underlying growth may have been a bit smaller due to the a amount of share buybacks - when firms purchase their own shares which usually sees a company's stock push higher as shares get scarcer.

"You have had the oil price fallen dramatically and of course the drillers, the shale - these guys have had profit hits there," says Nelson, adding, "we have gone really nowhere in the last 12 to 18 months in U.S. profits but that doesn't necessarily mean the economy is in recession which the latest data shows it clearly isn't."


Some market forecasters are hoping for an improved labor market in the U.S. in 2016 but inflation in wages and consumer prices are likely to remain moderate.

Last week, Mark Haefele, global chief investment officer at UBS Wealth Management, said in a market commentary on CNBC that corporate results this season are likely to confirm that large listed U.S. companies remain in a so-called earnings recession in the first three months of the year.

However, he added that this is expected to recover in the second half of 2016 due to three main reasons. These included stabilizing oil prices, fading pressure from the U.S. dollar and an improvement in the American economy.

Low oil prices continue to worry investors especially after oil producing nations failed to agree on a supply freeze on Sunday. Oil producing stocks slumped at the open on Monday. While tensions between Saudi Arabia and Iran have been blamed, other nations dependent on oil prices are feeling the impact.

''In keeping with some pessimistic expectations, the Doha meeting over the weekend failed to reach any conclusive agreement" Mihir Kapadia, CEO at Sun Global Investments told CNBC via email.

"The Saudis and their allies maintained their position of insisting that there would be no price freeze without Iran joining the agreement. In response to this, oil prices have fallen. This slide in oil futures has had a knock-on effect on Asian shares, with the drop only compounded by the aftermath of a deadly earthquake in southern Japan – the Nikkei 225 fell sharply for the second session in a row."

Fading pressure from the dollar is another reason for low earnings growth. The U.S. dollar has had less room to appreciate this year as the country adjusts to a more gradual timetable for rate hikes, UBS' Haefele pointed out, adding that international earnings at large U.S. corporations should be a better contributor to profit growth in future.

"Currency has been a big problem," Nelson says. "Like for in Europe last year, if you take (the) U.K. out where earnings were a disaster, down 20 percent and look at the euro zone that had 8 percent earnings growth last year - a lot of that was the flipside of the currency, the gain from a weak euro and U.S. loss from a strong dollar."

The U.S. equity markets rallied in the first quarter of this year despite expectations of weak earnings growth, but that may be attributed to a variety of factors. UBS Wealth Management has forecasted earnings growth for the S&P 500 at 3 percent this year and 7 percent in 2017.


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