The S & P 500 has fallen roughly 18% since the start of the year, but the beaten-up index could see a bounce in the second half of 2022, according to Citi. Analyst Scott Chronert cut the bank’s price target on the index to 4,200 from 4,700 in a note to clients Friday, citing recent Federal Reserve policy moves and recession risks among the reasons for the adjustment. Many of these factors, however, may already be accounted for in stock prices, Chronert said. “Fed hawkishness and the rising real rate impact on valuations has been a defining feature of the 1H drawdown, as stubborn inflation has persisted,” he wrote. “That is mostly priced into the current index level and multiple. Better than feared earnings and signs of peaking rates, combined with bearish investor positioning, support a positive 2H risk/reward setup.” The cut from Citi comes as markets have experienced one of the worst first halves of the year in decades and the S & P 500 lost about a fifth of its value as markets sold off. Meanwhile, inflation hit record highs, the Federal Reserve began hiking rates to curb surging prices and the S & P 500 fell into bear market territory. Fears of a looming recession have also risen in recent months, spooking some investors. Citi economists now peg the risks of a global recession at 50% with an expected arrival during the middle of 2023. Even as markets struggle, better than feared earnings, peaking rates, and risk-off investing trends could lead to a bounce in the second half of 2022, Chronert said. But he anticipates more risk to 2023 projections. “Relative to a current +11% earnings growth expectation for next year, our previous recession scenario work presumes a -10% hit to earnings next year,” he said. “That gap will become an increasing focus during 2H, but will need to be weighed relative to evolving Fed and interest rate considerations.” The S & P 500 is down about 18% since the start of the year and 19% off its 52-week-high. The index could rally another 7% from Friday’s close based on Citi’s new price target. — CNBC’s Michael Bloom contributed reporting
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