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US earnings may fall into recession, but Blackstone says it's still bullish on stocks

Key Points
  • "It's entirely likely that we have an earnings recession ... or something very close to it. But at the same time we don't have an economic recession," said Joseph Zidle, the chief investment strategist at asset management firm Blackstone.
  • An earnings recession can be defined as two consecutive quarters of negative earnings growth.
  • But that scenario "typically" leads to "pretty good" performance for stocks 12 months after, according to Zidle.

There may be fears that U.S. corporate earnings could face back-to-back negative growth this year, but that doesn't mean there'll be an economic recession, said Joseph Zidle, the chief investment strategist at asset management firm Blackstone.

In fact, Zidle that there'll be a buying opportunity for investors after an "earnings recession," which he defined as two consecutive quarters of negative earnings growth.

"I think an earnings recession is a real risk, but the most important thing to point out ... is that the business cycle, or the profit cycle, works at a different speed than an economic cycle," he told CNBC Thursday.

"Typically, you have more booms and busts in corporate profits than you have in an economy. So I think it's entirely likely that we have an earnings recession ... or something very close to it. But at the same time we don't have an economic recession."

Zidle warned of further volatility in the markets, and cited weaker earnings and central banks around the world turning dovish. "But I will use that as an opportunity to buy," he added.

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Blackstone: An earnings recession is 'entirely likely'

This week, Morgan Stanley sounded a warning, predicting there will be a "full-blown earnings recession" in American companies. The investment bank's chief U.S. equity strategist, Michael Wilson, said he's looking for two or more quarters of negative or flat growth.

He said the biggest drag on earnings is expected to come from the tech sector, with the energy sector also expected to have negative sales growth.

Bank of America Merrill Lynch analysts this week lowered their S&P earnings forecast for the year to a growth of 4 percent, from an earlier forecast of 5 percent.

But an earnings recession "typically" leads to "pretty good" performance for stocks 12 months after, according to Zidle.

"If we do get the volatility we are expecting in the next few months, I think 12 months from now, equities (will be) higher than they are today. That suggests that you buy, and you buy cyclicals — companies that are most leveraged to the global economic cycle — because I see that improving," said Zidle.

Some examples of cyclical stocks, which track the economic cycle, would be those in the energy, tech, and industrial sectors, which are cheaper than before, according to Zidle.

Talk of a recession heightened in the last few weeks as developments in March sent ominous signs of a potential downturn. For one, the yields on long-term U.S. debts became lower than those of short term debts: A so-called yield curve inversion which is widely regarded as one of the most reliable recession indicators.

On top of that, weak economic data also stoked fears: Manufacturing activity in the eurozone dropped to its lowest level in more than six years in March. The U.S. Federal Reserve also adopted a significantly dovish stance and projected no further interest rate hikes this year, justifying its more temperate outlook by cutting the 2019 growth outlook for the U.S.

— CNBC's Patti Domm contributed to this report.