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Risks ahead: A trader is seen working on the floor of the New York Stock Exchange. Goldman Sachs says a moderate recession could see the S&P 500 fall another 15% to 20% over the next six months. — AFP

THE US dollar’s rampant surge may finally force corporate America to wake up to a brewing earnings recession.

The investment puzzle of the summer so far is how spiking inflation and interest rates have darkened economic forecasts while barely denting the outlook for company earnings growth over the next 18 months.

As Wall Street’s top investment banks scramble to place odds on a looming recession – with many seeing at least a couple of consecutive quarters of US economic contraction as inevitable and others placing a 50-50 chance on a worldwide downturn – the “bottom up” view from boardrooms has remained weirdly sanguine.

And that’s why the start this week of the second-quarter earnings season and attendant forward guidance is awaited with such bated breath – not least for a full readout on the post-Ukraine invasion energy shock and climbing interest rates.

To date, “top down” recession calls have not been matched by an equivalent earnings rethink.

Aggregate S&P 500 earnings growth for this year is still in excess of 10% and even after slipping about half a percentage point over the second quarter, it remains above 9% for all of 2023.

“Economists and investment market strategists are unusually united in their predictions that recession is an inevitability,” said Jim Wood Smith at Hawksmoor Investment Management.

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“The fly in their ointment is that no one appears to have told businesses,” he added.

“The next two or three weeks will go a long way to resolving this tension.”

This may be just a lag of course as equity analysts hesitate in front of deteriorating macroeconomic calls and wait for their companies to tell them the bad news first hand.

Or it could be more fundamental than it seems.

One glimpse into the peculiarly distorted state of the economy right now could be seen in the latest survey of US small businesses – showing sentiment in June at its lowest since 2013 but demand for labour still robust as executives continue to grow operations.

And yet for larger multinationals with overseas earnings, something more immediate is pressing an alarm – the blinding appreciation of the US dollar against other major currencies as Federal Reserve tightening goes into overdrive while other central banks drag their heels.

While most market watchers are currently in thrall to the euro’s slide to parity for the first time since 2002, dollar strength is pervasive against most other currencies such as Japan’s yen and Britain’s pound and its broader DXY index is at its highest in 20 years.

There has only been four full calendar years over the past four decades in which the dollar index has gained more than 12% and it’s exceeded that already in 2022 so far.