Citi cut U.S. and global tech stocks to neutral and wants AI sentiment to improve before it recommends the sector again. The bank upgraded Europe outside the U.K. to overweight, and it keeps its S&P 500 year-end target at 8,100.
Citi's global strategy team lowered its rating on tech stocks globally and in the U.S. to neutral in a research note published Monday, during a particularly turbulent period for tech stocks. The analysts want to see improving sentiment toward AI stocks before they recommend the sector.
The bank also tactically downgraded U.S. equities, global tech and European tech to Neutral from Overweight, citing the risk that investor positioning could fall further.
Nasdaq trades at March 2020 forward valuations
The recent selloff has left the tech-dominated Nasdaq trading at forward valuations last seen at the onset of the pandemic in March 2020. Citi warned that positioning in the Nasdaq could slip from roughly neutral into net-short territory.
Citi estimates another 5% drop would be needed for positioning to turn properly negative. Meanwhile, the volatility has prompted a switch in market leadership from cyclical to defensive sectors, with the latter outperforming by 15% over the last month alone.
According to MarketWatch, Citi strategist Beata Manthey calls this the "steady market, violent rotation" phenomenon.
Citi sees balanced risks despite plunging AI sentiment
Citi now regards the risks to equity markets as more evenly balanced because earnings forecasts for 2027 have remained steady while stocks corrected. The drop in the oil price may also offer support.
However, AI sentiment has plunged, partly because the midterm results raised questions about the long-term trajectory of AI spending. Credit spreads have also widened and earnings revisions have slowed, but oil prices and bond yields have fallen and economic data remains resilient.
Europe ex-U.K. moves to overweight
Citi upgraded Europe ex-U.K. because the region is less exposed to tech and benefits more from falling oil prices. Its sector strategy is now a mix of cyclical and defensive stocks, with Overweight ratings on materials and health care.
For mid-2027, the bank predicts 5,000 on Topix, versus 3,895 at present. Its target for MSCI emerging markets is 2,050, against 1,355 now.
Citi's year-end target for the S&P 500 remains 8,100.
Sources: MarketWatch, Investing.com
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