By Rich Miller at Bloomberg
The profits recession is global -- and that's bad news for the world economy and for equity markets.
So say researchers at the Institute of International Finance, a Washington-based association that represents close to 500 financial institutions from 70 countries.
In their April "Capital Markets Monitor," IIF executive managing director Hung Tran and his team blamed the global decline in earnings on poor productivity growth, weak demand and a general lack of pricing power. U.S. companies also are being squeezed by rising labor costs as they add people to their payrolls.
The pervasiveness of the downturn means there's nowhere for corporations to turn. "In the past, if you had poor performance at home, you could recoup and compensate for that with overseas investment," Tran said in an interview. "But if you suffer declines in profits domestically and internationally, you tend to retrench."
That in turn raises the odds of an economic recession. He put the chances of a U.S. downturn within two years at around 30 to 35 percent due to the earnings slump, up from 20 to 25 percent.
The prolonged profits recession makes Tran and his associates skeptical that the recent rebound in global stock markets can last. They see prices stuck in a downward trend.
"With profits expected to remain under pressure for the foreseeable future, this situation will eventually exert downward pressure on equity prices," they wrote in their report.