Would a 2024 recession be ‘dire’ for stocks? Why Citi expects S&P 500 earnings to climb next year.

“A two-quarter recession does not need to be as dire of an outcome as commonly perceived,” said Chronert. “Our view allows for a rolling earnings recession over the past two years for the S&P 500.” 

In July, Citi’s equity analysts raised their price target for the S&P 500 to 5,000 for mid-2024, citing increased chances for a “soft landing” for the U.S. economy. Citi has not yet released an S&P 500 price target for the end of next year, Chronert said.

The percentage of companies in the index with positive year-over-year earnings growth appears set to rise in 2024, possibly to a 20-year high based on consensus estimates, according to a U.S. equity strategy note from Citi dated Nov. 24.

Citi expects that after “two years of EPS nothingness,” the S&P 500’s earnings per share should expand in 2024, according to the note. 

“Fundamentals in aggregate have been trading sideways,” Chronert told MarketWatch, describing the index’s EPS over the past two years as “flattish.”

Read: These ten stocks, not just from tech, are the key to next year’s S&P 500 earnings growth

Meanwhile, Citi’s economists have forecast a potential recession in the second and third quarters of 2024, Chronert said. Macroeconomic concerns include the Federal Reserve’s interest rate hikes aimed at slowing the economy to bring down inflation to 2%, which may weigh on consumer spending, he said. 

“If we do hit a recession in 2024, we don’t expect to see a significant deterioration of index fundamentals like we have seen in recent crises,” Citi’s equity analysts said in the note, referring to the widely followed S&P 500 benchmark for U.S. stocks.

 “A higher EPS floor likely creates a more manageable index drawdown,” they said. “If fundamentals continue to prove resilient, investors should buy pullbacks.”

In the rolling earnings recession Chronert says he has observed over the past two years, growth stocks have been the first to make an exit after leading the way into it, according to Citi. Cyclical and defensive stocks have continued to see EPS contract year over year, according to the note.

“2024 is setting up differently,” Citi’s equity analysts said. 

Citi expects to see fewer stocks with significant EPS declines of 25% or more next year compared with 2023 and the five-year average seen before COVID-19, the note shows. 

Chronert also pointed to an expected “surge” in the distribution of the S&P 500’s EPS growth in the ranges of  0%- 5%, 5%-10% and 10% – 15%, as seen in the chart below.

The U.S. stock market is up this year, with the S&P 500 rising 18.6% through Tuesday, after tumbling 19.4% in 2022. The index
SPX
closed 0.1% higher on Tuesday at around 4,555, according to FactSet data.

“The bottom falling out of S&P 500 EPS is a tail risk,” said Citi analysts. “A more resilient fundamental backdrop should support a higher equity floor even if sentiment and multiples sour.”

Meanwhile, BofA Global Research expects a “soft landing” for the U.S. economy next year and that the S&P 500 will finish 2024 at 5,000, according to Savita Subramanian, BofA’s head of U.S. equity and quantitative strategy. The S&P 500’s EPS probably has already “troughed,” she said Monday during a media briefing on BofA’s 2024 outlook.

See: S&P 500 may rise 10% by end of 2024 amid worries that small-cap stocks ‘can’t hack’ higher rates, says BofA