AI stock moves have 'clearly been extreme,' but the 'kicker' they provide prompts Citigroup to upgrade U.S. equities
By Isabel Wang
Citi moves its U.S. equity underweight back to neutral, and the tech sector to an overweight
Citigroup strategists has raised their recommendation on U.S. equities to neutral from underweight as recent advances in artificial intelligence (AI) boosts tech shares, while signs that the Federal Reserve is nearing the end of its interest rate-hiking cycle are also expected to drive U.S. stocks outperformance.
While price moves for AI-related stocks have "clearly been extreme," the frenzy may continue to remain a "kicker," given that it is not far enough developed to disappoint expectations yet, said a team of Citi strategists led by Dirk Willer, global head of emerging market strategy. "Given that AI is mostly a U.S. mega large cap theme, this should also reduce the risk of any U.S. underperformance."
"We implement this view by moving the U.S. back to neutral, and in the sector section, going overweight the tech sector," wrote Citi's strategists in a Friday note.
The strategists said the U.S. equity market has not "necessarily outperformed other markets" after the central bank was done hiking rates in the past cycles, but the weight of rate-sensitive growth stocks is relatively high when compared to past episodes.
The market sensitivity to interest rates will increase "even further" as the current stock-market rally is mostly powered by the AI theme. Willer and his team therefore expect a U.S. outperformance at the end of the Federal Reserve's monetary tightening cycle.
The recovery of the U.S. stock market this year has been led by megacap technology stocks as volatility in the banking-sector earlier this year ignited a rush into Big Tech shares to the extent that they are now seen as a safe-haven trade. The outperformance has extended to the second quarter after the craze around AI, expectations of the Fed pausing its rate rises, and a possible debt-ceiling deal in Congress continue driving bullish sentiment on tech stocks.
See:Nvidia barrels toward rare $1 trillion valuation after putting a dollar figure on AI boost
Citi's upgrade to its rating on U.S equities came a day after Nvidia's stock (NVDA) soared toward all-time high following the chipmaker's stronger-than-expected revenue guidance for its fiscal second quarter, which was driven by demand for its AI chips. On Thursday alone, the company's total market capitalization added nearly $184 billion, putting it within sight of becoming only the seventh U.S. company to top a valuation of $1 trillion, according to Dow Jones Market Data.
See: 'Ride the Nvidia wave.' Wall Street says the 'undeniably pricey' stock can keep roaring
Citi strategists in January decided to cut its recommendation on the U.S. to underweight from overweight with expectations that recession concerns and Fed hawkishness on monetary policy will peak during the first half of 2023.
"Equity markets bottom during a recession, not before it has even started," strategist explained in the Friday note. "However, we must admit that the long-awaited recession is still not overly close and the expected credit crunch -- fallout from the March banking turmoil -- has also so far not materialized in a significant form."
Citi economists are calling for a start to the recession in the fourth quarter of 2023, though they think risks are for this to be pushed out, rather than for it starting earlier.
U.S. stocks finished higher on Friday, with the Dow Jones Industrial Average recovering from five consecutive sessions of losses to end 1% higher. The S&P 500 advanced 1.3%, and the Nasdaq Composite added 2.2%.
-Isabel Wang
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May 26, 2023 16:07 ET (20:07 GMT)
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