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Citi equity strategists cut U.S. stocks to Underweight amid “expensive” valuations relative to other regions.
Market earnings expectations “still look too optimistic” in the U.S. especially as Citi believes the country will enter a recession in the second half of 2023. Instead, investors should focus on beaten-down European equities as “more bad earnings news is priced.”
The good news is that Citi believes rates will peak in the coming months. The bad news is that the broker’s equity strategists see MSCI AC World EPS contracting by 5-10% over the year.
“The bottom-up analyst consensus still expects +3%, suggesting plenty more downgrades. Forecasts amongst cyclical stocks look most vulnerable,” the strategists wrote in a client note.
Net-net, Citi expects global equities to be range-bound this year after a difficult 2022 year.
“We expect these two fundamental forces to cancel out over the year, leaving global equities range-bound. We would buy the dips, as advised by our Bear Market Checklist (6.5/18 red flags) but wouldn’t chase the rallies. We expect the MSCI AC World local benchmark (currently 730) to end the year towards the top of a 680-780 range, implying 6% upside from here,” the strategists added.
As far as global sectors are concerned, Citi is bullish on defensive sectors and cheap cyclicals (Energy, Financials) while being cautious on expensive cyclicals (IT, Consumer Discretionary, Industrials).
