Citigroup analysts consider impending recession to have more effect on U.S. equities

Quantitative strategists from Citigroup Inc. suggest that U.S. equities are priced with higher recession risks being taken into consideration, i.e. with higher risks than any other type of assets. Due to this fact, U.S. equities might be prepared for more losses.

A group of strategists along with Alex Saunders posted a note on October 18, in which they stated a necessity of additional adjusting of earnings estimates. This is needed because of the U.S. equities, which priced the highest risk of recession, which is still not enough, though. At the same time, U.S. bonds priced lesser risks, while the strategists pointed out that it might take some time for the bonds to react correspondingly to risks of recession, especially considering the hawkish position of the Federal Reserve.

According to a survey by Bloomberg, which was mostly conducted among Wall Street specialists on economic matters, a probability of the recession coming next year is currently estimated to be at 60%, while a month ago it was estimated at 50%. At the same time, according to the data provided by Citi, standard yield-curve probit models indicate that there’s a 34% probability of the recession. More bearish expectations are delivered by Eliza Winger and Anna Wong from Bloomberg Economics, they forecast a 100% probability of the recession to take place over the following 12 months.

At the moment, their general recommendation for investors is following the trend, which should be the main strategy, as it has proven to be useful for the periods of slowdown and stagflation.