Do You Think a Recession in 2024 Would Be 'Dire' for Stocks? Why Citi Expects S&p 500 Earnings to Climb Next Year?

According to equity analysts at Citigroup's research division, there is optimism that S&P 500 earnings could see an upturn in 2024, even in the face of prevailing macroeconomic concerns that have led some economists to predict a potential recession in the coming year.

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Scott Chronert, the head of U.S. equity strategy at Citi Research, revealed in a phone interview on Tuesday that the research arm of Citigroup projects a potential increase in the S&P 500's earnings per share (EPS) to around $245 in the next year. This estimate reflects an 11% rise from the current 2023 estimate. Notably, this positive outlook persists despite Citigroup economists anticipating the possibility of an economic recession in 2024.

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Chronert explained that their view allows for a more nuanced interpretation of a potential recession, stating, "A two-quarter recession does not need to be as dire of an outcome as commonly perceived." He added that their perspective allows for a rolling earnings recession over the past two years for the S&P 500.

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In July, Citi's equity analysts revised their price target for the S&P 500 to 5,000 for mid-2024, citing an increased likelihood of a "soft landing" for the U.S. economy. However, as of now, Citigroup has not released a specific S&P 500 price target for the end of next year.

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Based on consensus estimates, Citi's U.S. equity strategy note dated November 24 suggests that the percentage of companies in the index with positive year-over-year earnings growth is expected to rise in 2024, potentially reaching a 20-year high. The note mentions that after "two years of EPS nothingness," the S&P 500's earnings per share is anticipated to expand in 2024.

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Scott Chronert characterized the index's earnings per share over the past two years as "flattish," with fundamentals trading sideways. Despite macroeconomic concerns, Citi's equity analysts believe that if a recession does occur in 2024, there won't be a significant deterioration of index fundamentals, as seen in recent crises.

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The analysts state, "A higher EPS floor likely creates a more manageable index drawdown. If fundamentals continue to prove resilient, investors should buy pullbacks."

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Observing the rolling earnings recession over the past two years, Citi notes that growth stocks have been the first to exit after leading into it, while cyclical and defensive stocks have continued to experience year-over-year EPS contractions.

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Citi expects a different setup in 2024, predicting fewer stocks with significant EPS declines of 25% or more compared to 2023 and the five-year average before COVID-19.

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While acknowledging the potential risks, Citi analysts state that the bottom falling out of S&P 500 EPS is a tail risk, and a more resilient fundamental backdrop should support a higher equity floor even if sentiment and multiples turn negative.

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In contrast, BofA Global Research anticipates a "soft landing" for the U.S. economy in 2024, with expectations that the S&P 500 will finish the year at 5,000. Savita Subramanian, BofA's head of U.S. equity and quantitative strategy, expressed confidence that the S&P 500's EPS has likely already reached its trough, as discussed during a recent media briefing on BofA's 2024 outlook.

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