US Shares Have Simply Began Pricing In Recession, Citi Quants Say

(Bloomberg) — US stocks may resume their slump as they have only just begun to price in a recession, according to Citigroup Inc.’s quant strategists.

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The market has turned “decidedly defensive again,” the strategists including Hong Li wrote in a note Tuesday. Recent synchronized moves suggest “equity investors are paying closer attention to the increased credit risk,” they wrote.

To make matters worse, the upcoming earnings season may do little to help sentiment given that stock correlations have reached the highest since the onset of the pandemic, according to the note. That suggests individual results may get drowned out by extreme moves in interest rates and credit markets.

The bearish view echoes similar calls from other investment banks, including Goldman Sachs Group Inc. and Bank of America Corp., concerned that the S&P 500 has yet to bottom out as a hawkish Federal Reserve pressures earnings and equity valuations. The S&P 500 has risen almost 6% over the past two days after dropping to its lowest since November 2020 on Friday.

While the benchmark has retreated as much as 25% from its record high in January, the slump was less than half of the 56% peak-to-trough plunge during the global financial crisis.

READ: Wall Street Sees S&P Falling Further After Bear-Market Bounce

Hong’s colleagues at Citi including Chris Montagu also struck a cautious tone for global equities in a separate note on Tuesday. The firm’s main recommendation for the near term is to stay defensive and favor quality stocks with low risk and large caps.

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