[jyl]

There are various yield curve inversions to watch. I tend to watch the 2Y/10Y. Some people watch current vs forward yields.

Regardless of your preferred measure, the message from these inversions is that a recession is very likely to start in the coming year.

I’ve been expecting a recession for most of the past year. I’m thinking starting mid to late 2023. But the exact timing isn’t that important.

By now I think a 2023 recession is consensus, or nearly so.

The question now, in my opinion, is whether it is a mild recession (like 1990, 2001) or a severe recession (like 2008). Because the implications for earnings are different.

Consensus S&P 500 EPS is currently about $220 for 2022, $230 for 2023. Both have been dropping, about -5% over the past couple months. That implies +5% EPS growth in 2023 (from $220 to $230).

S&P 500 EPS never goes up in recessions. In the very mildest of recessions, so mild they might be called mid-cycle slowdowns, EPS may be flat. In a typical recession, -10% or so. A severe recession produces -20% or worse.

So, the yield curve inversions predict a recession, a recession means EPS flat to -20% year over year, so 2023 S&P 500 EPS should be more like $180-$220 if 2022 actually comes in at $220. Midpoint of that range is $200.

Stock valuations go down into recessions. The very bottom in price/earnings may come a little before the recession starts, or during it.

Currently S&P 500 NTM (next twelve months) P/E is in a 15-17X range (low end in October, high end now in December). If that P/E goes back to 15x, on $200, that implies S&P 500 at $3,000. Which is about -25% from here.

That is probably toward the worser end of reasonable scenarios. The more cautious Street strategists are saying a 3,000-3,500 range. A very mild recession could means something like 17x $220, or $3,740. That is probably toward the bester end of scenarios.

Anyways, the scenarios, at least the ones I feel are reasonably plausible, all point to something below where we are now.