Citi’s view on Corporate Earnings

Looking at earnings expectations for the S&P 500, consensus have only penciled in modest declines in 2020 (-9.4%), followed by a sharp recovery in 2021 (+19%). Citi Private Bank (CPB) view these estimates as far too optimistic and believe it could potentially drop to -35% for 2020, with downgrades on the horizon as the realities of a severe economic contraction materialize.

The earnings declines expected in 2020 are as severe as the Global Financial Crisis (GFC) in 2008 even though the cause of the present crisis is exogenous. Plotted out quarterly on a year over year basis, the decline and recovery parallels 2008/09.

The extent of the expected EPS decline in the “peak crisis quarter” (4Q 2008 and 2Q 2020 respectively), is driven by large losses in a subset of firms while others remain profitable. Citi analysts expect the dispersion between profits and losses of particular industries to be particularly wide in this recession.

Past performance does not guarantee future results, real results may fluctuate.

What does this mean for Portfolios?

Citi analysts favour higher quality assets in “COVID-19 defensive” areas such as healthcare, consumer staples, telecom services and digital technology. Many of these overlap CPB’s “unstoppable trends” and represent higher quality growth assets for the long run.

Even though they have performed better in the recent months – and are therefore less depressed in valuation – Citi analysts prefer maintaining these positions. The outlook for many “COVID-19 cyclicals,” industries such as autos and hospitality, is still grim. Others, such as US Banks may over discount eventual recovery.