Equity strategists at Citigroup Inc. lowered their view on U.S. equities, saying the case to diversify away from the asset class is strengthening as the trade war undermines economic growth and earnings.
Cracks in “U.S. exceptionalism” will persist with the emergence of China’s DeepSeek artificial intelligence model, Europe’s fiscal expansion and rising trade tensions that will hit American companies harder than peers in Japan and Europe, a team led by Beata Manthey wrote in a note, downgrading U.S. equities to neutral from overweight.
“The drivers of exceptionalism are fading, both from a gross domestic product and earnings-per-share perspective,” the strategists wrote. “The U.S. market remains relatively expensive, while EPS downgrades are intensifying.”
The Citigroup strategists joined a band of Wall Street heavyweights including Bank of America Corp. and BlackRock Inc. that have turned cold on U.S. equities as uncertainty about the endgame for U.S. President Donald Trump’s trade policies raise the specter of a recession. Investors are still overweight U.S. stocks, leaving room for further diversification, the strategists wrote.
While the S&P 500 Index’s earnings-based valuation has dropped below the five-year average, it is still trading at 19.4 times of 12-month forward earnings compared with a ratio of 16.5 times for the MSCI World Index, according to data compiled by Bloomberg.
In a separate note, Citigroup’s head of US equity strategy Scott Chronert reduced his year-end target for the S&P 500 to 5,800 from 6,500, implying an eight per cent gain from Friday’s close. He slashed his earnings estimate for the index to US$255 from $270 due to the tariffs turmoil and signs of slowing economic growth.
“The China tariff standoff persists and provides its own level of drama, and concern,” Chronert wrote. “The goldilocks sentiment in place entering this year has given way to abject uncertainty.”
Manthey and her team double-upgraded Japanese equities to overweight from underweight, citing the Asian market’s cheap valuations and the likelihood of a tariff reprieve from the U.S.
They maintained their overweight stance on Europe, saying the region’s stocks have fully priced in 20 per cent tariffs, while fiscal stimulus and policy easing will provide tailwinds. Within the region, they upgraded the U.K. to overweight based on cheap valuations.
The strategists also downgraded emerging markets to underweight from neutral as they see China disproportionately affected by tariffs. Within the asset class, however, they stayed overweight on India, which is less exposed to trade duties, as well as Taiwan, Chile and South Africa.
The calls by Manthey and Chronert differ from those of the firm’s macro strategists, who last week upgraded U.S. and European stocks to overweight after Trump issued a 90-day pause on tariffs.
Abhishek Vishnoi, Bloomberg News
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