Citi gets more bullish on U.S. stocks thanks to AI, goes long tech

The Citi global strategy team is upgrading its view of the U.S. stock market, counting on AI driving outperformance against other global markets when the Fed is done hiking.


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Citi boosted its view on U.S. equities to Neutral, having been Underweight against other major markets.

“While the US equity market has not necessarily outperformed other markets after the Fed was done in the past, we would note that the weight of rates sensitive growth stocks is relatively high when compared to past episodes,” Citi strategist Dirk Willer and team wrote in a note Friday. “We would also note that US markets are powered by the AI theme, which tends to increase rates sensitivity even further.”

“This theme is of course highly specific to the US market, and we would therefore expect US outperformance when the Fed is done,” Willer said. “While price moves for AI related stocks have clearly been extreme, especially at a time when monetized use cases are still in the future, and with barriers to entry not overly high, we would still expect that it is too early to fade the moves before AI has even developed far enough to be able to disappoint expectations.”

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“Given that the AI darlings are mostly US mega-large caps, we close our US underweight, moving it back to neutral,” he added. 

“In our industry selection, further below, we are going to overweight the sectors that contain the key AI darlings (technology and communication services). The NDX (COMP.IND) (NASDAQ:QQQ) is in a bull market, characterized by higher highs and higher lows, and typically has made new highs before retesting the lows, once the 200dma was decisively broken.”

Citi says it now favors Tech (XLK) (XLC), Healthcare (XLV), Consumer Staples (XLV), Industrials (XLI) and Energy (XLE) against Consumer Discretionary (XLY), Real Estate (XLRE), Financials (XLF), Utilities (XLU), and Materials (XLB). 

As for the Fed, Citi economists are pricing in two more rate hikes, but the global strategy says “we are getting close” to the end of the cycle.

“We have shown in the past that for the very long history the SPX has been mostly flattish after the last hike, but the more recent decades (since 1989) have seen SPX (SP500) (NYSEARCA:SPY) (IVV) (VOO) outperformance after the last Fed hike,” Willer said. “Given widely held bearish views, and the fact that we are still in the bad news is good news regime (which we introduced here), we would imagine that an end of the Fed hiking cycle, not driven by a crisis situation, would be bullish for US equities.”

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