As we head into the earnings season, U.S. companies may reveal a significant fall off in profits over the first quarter, extending a so-called earnings recession. Exchange traded fund traders, though, can hedge against the potential volatility with inverse or bearish products.
S&P 500 Index company profits are projected to fall 9.8% in the first quarter year-over-year, the sharpest decline since the third quarter of 2009 and a fourth consecutive quarterly contraction, according to Bloomberg.
While slightly less pessimistic, FactSet projects first quarter earnings to decline 8.5%, which is significantly lower compared to its previous estimated earnings growth rate of 0.8% for Q1 2016 at the start of the year.
Alex Bellefleur, head of global macro strategy and research at Pavilion Global Markets, argues that the earnings results will be insufficient to justify current valuations, which suggests that the equities market could have a hard time ahead.
Consequently, investors seeking to hedge against a potential pullback in an expected weak earnings season may turn to inverse or short ETFs.