Citi's Chronert says a recession is near; shares his 'top conviction calls' to tough it out

Published Thu, Jan 5 20237:49 PM EST

Citi's Scott Chronert expects a mild recession in the first half of this year and revealed three strategy calls that could help investors trade the downturn. The investment bank's U.S. equity strategist predicts that the S & P 500 could reach 3,700 by the middle of the year, and 4,000 by year-end. The index is currently at around 3,850. "I've been calling for a first-half recession since the middle of 2022," he told CNBC's "Squawk Box Asia" Thursday, noting that some of Citi's economists are expecting it to hit in the second six months of the year. "In any event, I think we're going to feel the recession effects during the first half," Chronert added. However, he warned in his 2023 outlook that "historic recession playbooks may disappoint." As such, he shared three "top conviction calls" with CNBC that could help investors navigate the macro environment. In an email to CNBC, Chronert said he expects: Earnings to be "more resilient" than expected during a recession period; Relative strength in the industrials and energy sectors; A gradual return to a "more traditional valuation approach," with a sector rotation away from tech. Earnings Earnings will likely come in better than expected, according to Chronert in his outlook for this year, published in December. "The impact of recessionary conditions may vary across sectors over the year. The net effect is that index-level earnings should prove more resilient than commonly expected," he said. He predicts a $216 earnings per share estimate for the S & P 500 by year-end. It's currently around $218. Strength in some sectors Chronert likes both industrials and energy looking ahead. "You're going to see fairly strong relative performance out of traditionally economically sensitive sectors such as industrials and energy. And the energy sector carries a low valuation right now," he told CNBC Thursday. In the December note, Citi listed a number of "preferred" U.S. energy stocks including APA and EOG Resources . In industrials, the bank's analysts like Rockwell Automation and Trane Technologies . Chronert also wrote that he is bullish on the category of firms he dubs "tech users" – companies aligned with the longer-term "structural shift of incremental reshoring and margin expansion implementing tech in the value chain." His preferred stock in this area is agricultural equipment maker Deere and company , also under the industrials sector. Rotate away from mega-cap growth stocks In the long term, tech or mega-cap growth stocks will give way to an "industrial resurgence," Chronert wrote in his year outlook. "Over time, industrials, energy, materials, and staples may see their weights within the S & P 500 increase at the expense of tech and [communication] services," he added. As such, he told CNBC Thursday that he's "steering somewhat clear of" mega-cap companies. — CNBC's Michael Bloom contributed to this report.