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22V Survey Results: Recession Expectations Significantly Lower, EPS better

Published on May 18, 2023

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Dennis DeBusschere

Brian Herlihy

Kevin Brocks

Sophia Wang

Quick summary:

Investors have lowered 2023 recession expectations.
- 57% now expect a recession, down from 83% at the end of March.
Respondents that don’t expect a 2023 recession don’t necessarily expect a 2024 recession. A recession hasn’t just been pushed off.
- 49% of the investors who do not expect a recession in 2023 also don’t expect a recession in 2024.
Investors who do not expect a recession have raised their eps expectations.
Respondents who do not expect a recession have kept eps expectations pretty consistent.
59% of respondents think the Fed will cut rates in response to a hard landing or economic shock; 35% expect rate cuts following a soft landing.

Recession Expectations Lower: Investors had been expecting a recession this year, with between 75%-90% of our respondents putting the odds of a recession in 2023 above 50% consistently since January. That has changed. Now, only 57% expect a recession in 2023.

It’s May, so the odds of a recession in 2023 should be lower just as a function of the calendar, but investors who do not expect a recession in 2023 don’t necessarily expect a recession in 2024 either. 35% of respondents who do not expect a recession in 2023 put the odds of a 2024 recession below even, 14% right at 50%, and 51% above even. In other words, there is a new cohort of investors (31% of respondents) who do not expect a recession at all.

Recession odds are almost entirely within the next 12 months. On Jan 1 of this year, only 9% of investors did not expect a recession within the next 12 months. Recession odds are not just being rolled forward they are being reduced outright.

EPS Estimates Improving: Investors who do not expect a recession have raised their eps expectations $7 for 2023 and $10 for 2024. And again, the number of respondents falling into the no recession camp is much higher. The change in eps estimates is more moderate for those expecting a recession, with a $3 increase for 2023 and -$1 decrease for 2024.

1Q earnings were better than expected. When reporting started, index EPS was expected to contract -8% y/y. The final result was -4%. Guidance improved too. Negative earnings guidance has been consistently easing, reflecting reduced concerns about downside risk.

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Rate Cut Expectations: Consistent with lower recession risk, 35% of investors expect the first rate cut to be because the economy has had a soft landing and the Fed does not need to be restrictive. 36% think a hard landing and 23% expect another shock.

More respondents who expect a soft landing think rate cuts will come in December 2023 or next year than those who expect rate cuts because of a shock or hard landing. The cuts priced into the futures curve for 3Q are mostly a product of recession risk.

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