Quick summary:
- Investors are even more convinced of a recession in 2023 (83%)
- Those who expect a recession (> 50% odds)…
- 2023 S&P EPS: $207
- 2024 S&P EPS: $221
- Like Tech, Health Care, Utilities, Staples, and Energy
- Like Quality
- Those who do not expect a recession (< 50% odds)…
- 2023 S&P EPS: $213
- 2024 S&P EPS: $223
- Like Tech, Energy, Staples, and Real Estate
- Also like Quality
Recession Odds: Banks failures edged up investor perceived odds of a recession, but investors were already pretty confident in a recession before SVB. In January, 71% put the odds of a 2023 recession above 50%. Now, 82% expect a recession in 2023. On January 1st 2023, 91% of investors thought recession odds in 2023 were above 50%. People have been consistent in the base case of a recession.
78% expect the recession in 3Q or 4Q.
EPS Expectations: Investors who put odds of a recession above 50% think 2023 S&P EPS will be $207 and 2024 EPS will be $221. Those who do not think a recession is likely think EPS will track $213 in 2023 and $223 in 2024. The differences aren’t very large, likely because the debate is between a slowdown and a recession, not strong growth and a recession. FYI, the odds are pretty high that earnings would be above 2022’s $222 number in a non-recession scenario.
Earnings expectations have come in across the board since January, particularly within the no recession camp.
Sectors: Investors like Tech, Defensives, and Energy regardless of recession expectations. But the camps like different Defensives (except for Staples, which is popular for both). The recession cohort prefers Health Care and Utilities while the no recession cohort like Real Estate more.
Tech is a clear favorite and Fins, Industrials, and Discretionary are all disliked regardless of recession odds. Investors are split on Energy, as has been the case for most of this year (HERE). We like Early Cyclicals as inflation moves lower and Communications and Discretionary, two sectors that people really don’t like, would benefit.
One footnote – our survey respondents like Tech (24%), but it’s not as unanimous as investors expect (61%). Basically, you are not firmly in consensus, as you might think, by being overweight Tech. At least according to the survey.
Factors: Like with Tech, investors love Quality regardless of recession odds. Respondents with lower odds of a recession have more Growth exposure than those who don’t.
Almost no one thinks Quality will be this year’s worst performer. There is a clear consensus for long Quality, short Momentum and Risk. And there is more debate between Value and Growth. The rank correlation between Value and Growth is still unusually high, meaning the return dispersion between the groups is lower than usual anyway.
Our survey respondents don’t realize just how popular Quality is. 62% think Quality will be the top performer. Only 34% think other people picked Quality as the best performer.
Quality has been the top factor pick for a long time now. Following the bank failures, even more investors like Quality.
10yr: We did not do a very good job asking about 10yr yields. We did not make it clear we meant the peak in the 10yr going forward. A number of respondents said the peak was in (a fair response) so we’re reluctant to dig into the results of this question since people had different interpretations. Our bad.
