(Bloomberg) -- US stocks can keep climbing next year even after posting banner returns in 2023 and 2024, with gains fueled by economic and corporate profit growth, according to Citigroup Inc.’s wealth division. But investors probably should look for opportunities beyond the usual suspects.
“S&P 500 Index returns sound wonderful, but it’s backward looking,” Steven Wieting, Citi Wealth chief investment strategist and economist, said in an interview. “We have to expand portfolio horizons and expect some of the other assets that are really out of favor right now to be driving incremental returns going forward.”
The recommendation to diversify comes with the S&P 500 up 28% in 2024 after a 24% advance in 2023, which would make it only the fourth time in the last 100 years that the US equities benchmark has posted back-to-back annual gains of more than 20%. That’s left some of Wall Street questioning whether the torrid run can continue with sky high-valuations and the threat that President-elect Donald Trump’s proposed tariffs and tax policies could reignite inflation and spur volatility.
So Wieting is urging clients stay away from the technology behemoths that have driven much of the S&P 500’s performance. Instead, he recommends investors buy small- and mid-capitalization stocks, banks, and companies that will enable manufacturing reshoring, and that they consider overseas stock markets including Brazil, Japan and India.
“We are not going to be aligning the future just to S&P 500 returns,” Wieting says, adding that other asset classes globally have gotten cheaper, presenting compelling opportunities. “Optimism has certainly diminished some, but people probably are still waiting around for a bear market and a recession and not understanding that was played out in financial markets in 2022.”
Wieting’s office also says hedge funds can strengthen allocations, and that private asset classes can help juice returns. In the bond market, Citi Wealth is advising clients to look beyond US Treasuries to investment-grade corporate credit as a core portfolio holding.
Investors, however, aren’t giving up on Big Tech stocks just yet. Technology names led US equities higher on Wednesday, as the Nasdaq 100 Index set another record after inflation data came in as expected, cementing bets that the Federal Reserve can keep cutting interest rates.
Citi Wealth is one of several major financial shops advising clients to look further afield for returns with profits for most megacap tech firms poised to slow. The so-called Magnificent Seven — Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. — are expected to post a combined earnings increase of 18% in 2025, down from a projected 34% for 2024, according to data compiled by Bloomberg Intelligence. But it’s just 3% if you strip out artificial intelligence juggernaut Nvidia.
“In the US, quality, profitable growth companies with lower market caps than the megacaps are where we want to be,” Wieting said, adding that “holding a lot of cash will remain unrewarding.”
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