By Senad Karaahmetovic
The U.S. market is slow in pricing in the EPS recession, which is about to begin, Citi’s strategists told clients in a note today.
The upcoming global EPS recession would be the 8th in the past 50 years, according to equity strategists. History shows that prior EPS recessions lasted 2 years and saw earnings drop 31%.
Citi remains well under consensus for global EPS growth as it expects a 5-10% contraction, compared to the consensus of +5%. The firm’s economists also see earnings falling by 20% in case of a hard landing scenario.
“Our models suggest that Citi’s top-down forecast of a 5-10% global EPS contraction in 2023 is largely priced into equity markets. An outcome nearer the average 31% downturn would imply another 20-30% off global equities,” the strategists said in a client note.
While Japan, Europe, and emerging markets have already priced in double-digit EPS drop, the U.S. is yet to price in such a scenario.
“Higher valuations mean that the US looks more vulnerable to significant earnings disappointment,” the strategists added.