The latest round of corporate earnings is leaving Wall Street with a confounding sense of relief and lingering anxiety.

Companies are in the midst of an “earnings recession,” meaning profits have contracted for two straight quarters, starting with a 4.6% drop at the end of 2022.

Profits for S&P 500 companies shrank just over 2% last quarter, compared with forecasts of a 6.7% drop. That brought some relief to Wall Street that the quarter wasn’t as bad as it could have been. But, analysts also expect more pain ahead.

Analysts polled by FactSet now expect a 6.4% contraction for profits in the current quarter. That shows just how worried analysts are about the impact from inflation on businesses and consumers. Fears about a recession continue to weigh on the broader economy and are a big factor in corporate and independent forecasts for company profits.

“With a recession still looming, it’s unlikely that earnings have hit rock bottom,” said Michael Arone, chief investment strategist for State Street’s SPDR Business. “But investors sure are celebrating the first quarter earnings season as if they have. This should leave investors feeling cautious, not confident.”

The very thing that benefitted profit margins as inflation started heating up is now a big weight on earnings. Many companies raised prices on goods and services following the pandemic and consumers were more than willing to pay, which led to record profit margins some companies. High prices, though, have been slow to moderate and consumers have grown more weary and cautious about spending.

The biggest losers in the first quarter included a wide range of companies that make raw materials, such as metals and chemicals. Profits fell 25% for the S&P 500′s material sector as the economic slowdown cut into revenue for companies including chemical maker Dow and packaging company Sealed Air.

Utilities and health care companies also has broad contractions, along with communications and technology companies.

Many companies are still dealing with high costs and a tight labor market as the global economy keeps slowing. Margins and overall earnings will likely fall throughout 2023 as companies deal with a recession, according to a report by Wells Fargo Investment Institute global equity strategist Chris Haverland.

Concerns about a recession have hung over corporate earnings and forecasts for several quarters. The number of companies citing the term “recession” declined for a third straight quarter, according to research by FactSet, but the figure is still well above the five-year average.

Target was among the bigger retailers issuing a cautious sales and profit outlook after reporting another slip in quarterly profits. The nation’s largest home improvement retailer reported disappointing revenue during its most recent quarter and cut its profit and sales outlook for the year.

(AP)