S&P 500 earnings resilience remains intact post pullback: Citi

The resilience of S&P 500 earnings remains intact despite growing recession fears and recent negative price action, Citi strategists said in a Wednesday note.

The bank’s Citi Economic Data Change index, which summarizes US macro data trends, is indicating further deterioration for the U.S. economy. A reading of -500, which suggests recession-like conditions, could be reached if data continues to worsen, Citi added.

But interestingly, while economic data was weak in 2022, S&P 500 earnings growth remained flat rather than severely negative, as rolling earnings recessions mitigated the overall index impact.

Overall, the strategists maintain confidence in their $250 EPS forecast for the S&P 500 in 2024, which is slightly higher than the current bottom-up consensus of around $243.

"But even that level of earnings, if not somewhat lower, would still represent significant improvement over 2023,” strategists argued.

“While not locked in by any means, with Q2 reports mostly behind and most corporates essentially halfway through Q3, we struggle to see earnings expectations moving materially lower than current consensus."

"The bigger issue will be with 2025 earnings should more pronounced macro slowing unfold during the remainder of this year. But, again, we expect more resilience versus history."

They highlight that productivity and secular tailwinds support high-single to low-double-digit EPS growth in 2024. With these expectations intact, the recent correction from the index’s high has mitigated some valuation concerns.

"Therefore, we believe investors should add to names where they have high conviction in fundamentals."

The strategists advocate for a “growth is defensive” approach to stock selection and suggest screening for names that may now be more reasonably priced relative to expectations. While repositioning portfolios defensively is prudent for a more severe recession outlook, this is not their base case.

Traditional valuations have moderated somewhat with the recent market pullback, and their valuation composite has fallen below its 80th percentile. Notably, market-implied growth expectations have diminished, particularly for growth stocks, creating a more balanced setup moving forward.