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Citi U.S. equity strategists slashed the firm’s year-end price target for S&P 500 to 4000 from 4200. The lowered price target reflects slashed EPS estimates to $221 from $226.
As far as 2023 is concerned, the mid-year price target is now 3800 (down from 4200) while the year-end price target is introduced at 3900. This reflects the $215 EPS estimate for 2023.
“The implication is that we see upside to year end, and a flattish environment for ’23, even as recession conditions are expected for 1H ’23. Although the earnings growth outlook for ’23 looks aggressive, we continue to argue that a mild recession impact on earnings may be less severe than feared,” the strategists wrote in a client note.
Citi strategists expect to see a “gradual shift” in the Fed’s rate policy in the first half of the next year, a move that should provide support to equities.
“Over the past four recessions, the pattern has been for multiples to work lower early in a recession and then higher toward the end of a recession. Typically, the price action leads earnings on the way down, and on the way back up,” the strategists added.
The strategists also highlighted two tail risks for the U.S. equities: 1) the current rapid pace of Fed rate hikes results in unintended consequences, and 2) inflation/economic data deteriorate more quickly than currently discussed.
