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

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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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