: Almost everyone is expecting a recession next year, but the market is forecasting earnings growth, this model finds


Outlooks for next year are coming in fast and furious, and if there’s one commonality it’s the belief the U.S. will fall into a recession at some point next year, hurt by the lagged impact of Federal Reserve rate hikes.

That’s what the bond market, as shown by the deepest inversion of 2-

and 10-year

Treasurys since the 1980s, is suggesting as well. But, surprisingly, the stock market is expecting earnings per share to rise next year.

That’s according to a Citigroup analysis. They compare a MSCI index’s trailing price-to-earnings ratio to its 15-year median. “The methodology is intentionally simplistic. It ignores varying inflation and interest rates across different cycles. However, we find it has a decent track record at estimating what might already be priced in as a downturn begins and hence how far the market might fall for a given drop in corporate earnings,” say strategists led by Robert Buckland.

The result, for the U.S., is that growth of 4% in earnings per share is implied. The Citi analysts point out that’s pretty close to what the sellside bottom-up consensus for next year shows as well.

Other markets are more pessimistic. Citi’s analysis shows that the Japanese market is pricing in a 12% drop in earnings per share. The U.K. is forecasting a 19% slump.

The S&P 500

closed lower on Wednesday for a fifth straight session and has dropped 17% this year.

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