Citi cuts U.S. stocks to Neutral as megacap growth is 'set for a pullback'
Citi equity strategists downgraded US and UK stocks to Neutral from Overweight, while on the other hand upgrading Europe stocks to Overweight.
They highlight that Europe stocks are trading “at a record discount to the US” while “pricing in a more reasonable EPS growth path.”
Citi upgraded US stocks just last quarter but the strong YTD rally forced strategists to return to the sidelines. The strategists argue that megacap growth is “set for a pullback” while US recession risks “could still bite.”
“Our US strategists think Growth may be set for a pullback as AI euphoria enters a digestive phase. Recession risks remains elevated. Volatility tends to rise after a sharp fall in market breadth. Global inflows boosting the Japanese equities should peak soon. We remain more constructive to mid-24 on recession resolution and a pivot from global central banks,” they wrote in a client note.
Globally, Citi sees a 5% EPS contraction in 2023 and a “modest” 5% expansion in 2024.
“Our forecasts imply a modest EPS slowdown, rather than a full EPS recession. Risks to the outlook appear more balanced than before; while “soft landing” scenarios are possible, tighter credit conditions and central banks liquidity remain key headwinds. Our market targets now point to near-term downside, with a more constructive medium-term view,” it is added in the note.
Sector-wise, the strategists recommend a portfolio focused on a mix of Quality and selective Cyclicals. The IT sector is also cut to Neutral on a potential pullback in megacap Growth, although Citi strategists urge investors to be ready to buy back on dips.
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