It’s not often that the second quarter kicks off with Wall Street already bracing for a calendar year decline in S&P 500 earnings. According to Refinitiv, the consensus has the index earning $219 in 2022 with a little decline this year, to $215. This is a heartening development for the bulls; the S&P declined 18% last year in part because Corporate America was giving warnings about 2023 profits. “Good” thing it happened too; a 2023 earnings multiple of 19.1 is on the rich side when overnight money is playing around with 5%.

One of the issues—and this happens all the time—is the Street’s $238 forecast for 2024, which appears aggressively high. In a scenario that sees the Street nailing 2023 with earnings per share of $215, the question to be begged is how such 10.7% growth would come to pass. Flip a coin on whether or not 2024 sees a recession, then cook in something like 2, 3, 4, or 5% inflation and it is tough to get the math to work on $238 for calendar 2024. It may not be too big of a deal though because many of us have been around long enough to know that next year’s earnings estimates are so frequently too high that it has become something of a known quantity in top-down strategy circles.

You can sometimes get an idea for the coming earnings picture by looking at junk bond yields. It wasn’t long ago—2021’s second half to be exact—when the ICE BofA U.S. High Yield Index was plumbing levels below 4%. “High” yield it wasn’t. But now the index can reclaim its name; it closed out Q1 on offer at 8.52%.

Those yields are great news for junk bonds, not so great for S&P 500 earnings. Historically, big jumps in speculative grade bond yields have served as a profit warning, so long as the yield pops of 1998-2000, 2007-2008 and 2014-2016 are a guide. Part of the reason is plain as day: companies must roll over maturing debt into new obligations with big coupons. The other reason is a little more subtle; the credit markets’ sell-off warns of deteriorating business conditions.

Additionally, there is the matter of the labor shortage, which we think will subside. Still, that doesn’t change the equation in the here and now. The Atlanta Fed Wage Growth tracker refuses to come down by any material order of magnitude; it clocked in at 6.1% in February, the latest month for which we have data. That is almost exactly equal to the 6.0% year-over-year CPI growth rate. That means margins are ok, you may be tempted to say.

Not exactly. We lost track of how much ink we have spilled on the force that is the housing components of the CPI report, the elephant that often single-handedly moves the headline number. The reality is that the CPI is still capturing housing’s 2021 hyperinflation and the gentle inflation of 2022’s first quarter in the current data, owing to the lagged effects of both owners’ equivalent rent and rent. It’s a far cry from the true situation – home price deflation—with which most of the country currently finds itself.

If wage growth remains sticky in the 6% area, perhaps with a drift down to something like 4-5% growth as the year progresses, it may be tough for some companies to hold the line on operating margins if they cannot increase revenues.

There is something else in all this, something that gets little attention. How about the corporations that played the last 2-3 years prudently? The companies that never made the wild acquisition, the companies that chose to build up cash on the balance sheet? While the debtor is rolling over old corporate bonds at new, painful yields, some are suddenly in a situation where they have low or no debt, with a cash hoard earning something north of 4% in T-Bills. It just goes to show that even in a recession, should that be our 2023 environment, there are always winners.