Citigroup strategists wary of US stocks – Investors can look to alternatives here

• Citigroup strategists cautious on US equities
• “Megacap growth” likely to slow down
• Alternatives to US equities

Despite the US Federal Reserve’s interest rate pause, market participants have remained cautious recently because, as can be seen from the minutes of the last interest rate meeting, “almost all” members of the monetary policy committee expect further interest rate hikes this year.

However, the US inflation figures for June released last week provided some relief. Consumer prices rose 0.2 percent month-on-month and 3.0 percent year-on-year, according to the US Department of Labor. That meant the lowest rate in more than two years. Meanwhile, core consumer prices rose 0.2 percent for the month and 4.8 percent for the year.

Meanwhile, US banks started the reporting season for the second quarter of 2023 ahead of the weekend – and investors should be anxiously watching the figures from other companies.

Citigroup strategists cautious on US stocks

However, Citigroup is currently cautious about the US stock market. After a strong first half of the year, Citigroup strategists downgraded US stocks to neutral from overweight last quarter, MarketWatch reports. At the major US bank, one is cautious about how far the titles could rise.

“Our US strategy team believes that megacap growth will slow while the risk of a US recession may still bite,” Scott Chronert wrote in a recent note to clients. “Investors continue to weigh the risk of a longer-term higher Fed versus the state of a rolling sector recession, which implies a less defined bottom line. We expect a decline [in der zweiten Hälfte]to move more aggressively into US equities by 2024,” said the US equity strategist.

According to Chronert, “The leadership of the mega-cap technology/growth industry” lifted the valuation of the market-wide US index S&P 500 above the upper end of the strategists’ fair value model in the first half of 2023. This was not supported by subsequent earnings or lower 10-year yields. Meanwhile, the technology-heavy selection index NASDAQ 100 managed in the first half of 2023 with a price increase of almost 39 percent, the highest increase in a first half of its 38-year history.

A chart by Citigroup shows which US sectors strategists have downgraded: tech hardware, household products, food and beverages, healthcare equipment, energy, pharmaceuticals and communications services. Conversely, they upgraded the capital goods, materials, semiconductors and consulting services sectors.

Alternatives to US stocks

While Citigroup remains cautious on US stocks, strategists have upgraded European stocks to overweight, MarketWatch reports. These are trading at a record discount to US stocks and could be boosted by a weaker dollar and stimulus measures in China. Citigroup therefore rates the sectors basic resources, industrials, healthcare, media, technology and telecommunications as “overweight”.

Meanwhile, Citigroup has downgraded the UK to neutral while upgrading emerging market equities to overweight. “EM offers a more interesting risk-reward profile with a combination of growth and materials. It could also benefit from USD weakness, rate cuts and a possible improvement in China sentiment,” quoted MarketWatch strategist David Groman.

Alongside this, the strategists maintain their “overweight” rating on China, as “the current valuations […] an attractive “entry point” if Beijing offers strong policy support, as well as its “underweight” rating on Japanese stocks as the rush of foreign money into that market could reverse, strategists say.

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