US Stocks Have Just Started Pricing In Recession, Citi Quants Say


(Bloomberg) — US shares simply posted a uncommon streak of quarterly declines and are in a bear market, however Citigroup Inc. quantitative strategists say they’re solely simply beginning to mirror the dangers of a recession.

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A workforce led by Hong Li mentioned equity markets had “turned decidedly defensive” and that they might come beneath additional strain as they proceed to be “heavily driven” by heightened bond market volatility in addition to considerations round persistent inflation and a staunchly hawkish Federal Reserve.

“We are still in the early stage of positioning for recession” and there’s “more downside risk for the market and the earnings season,” Hong wrote in a be aware dated Oct. 4.

The bearish view echoes related calls from different funding banks together with Goldman Sachs Group Inc. and Bank of America Corp., who’re involved that the S&P 500 has but to backside out even because it posted three straight quarters of declines — its first such streak for the reason that international monetary disaster.

READ: Wall Street Sees S&P Falling Further After Bear-Market Bounce

Stocks have rallied within the first days of October, partly on bets that current weak point in financial information might immediate the Fed to tone down its hawkish coverage, however a slate of strategists has warned it’s too quickly to anticipate the central financial institution to shift gears. US index futures had been down about 0.8% on Wednesday after the largest two-day achieve for the S&P 500 since April 2020.

Stock buyers’ deal with elevated credit score dangers additionally doesn’t bode properly for the third-quarter earnings season, which kicks off subsequent week, Citi strategists mentioned. “Individual company earnings may be overwhelmed by extreme volatilities in the macro drivers,” they wrote, including that their earnings shock mannequin predicts extra unfavourable shocks for economically delicate sectors.

Barclays Plc strategist Emmanuel Cau agrees that the danger to earnings estimates is elevated. “Equity valuations have normalized on surging real rates, but earnings reset still lies ahead,” he wrote in a be aware on Wednesday. “Consensus estimates of high single-digit EPS growth and margins expansion in 2023 look way too high.”

(Updates with US futures and Barclays feedback from fifth paragraph.)

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