Marina Lubimova
The call is based on three factors: positive earnings revisions, improving liquidity and few signs of broad market deterioration. Citi continues to prefer U.S. equities.
Earnings Still Support the Market
- Earnings revisions remain positive. Profit expectations have not rolled over enough to signal a broader equity downturn.
- Liquidity is improving. Financial conditions are becoming more supportive for risk assets.
- Market stress remains limited. Citi's indicators are not showing the combination of signals typically associated with a major market peak.
- U.S. equities remain preferred. The bank sees a stronger setup in the U.S. relative to other regions.
- AI weakness remains concentrated. Recent concerns around AI-linked stocks have not yet spread into a broader deterioration in earnings or market conditions.
The AI trade is the main source of near-term uncertainty. Citi's view is that weakness in expensive technology and semiconductor names could result in sector rotation rather than an index-wide selloff.
Capital moving from AI leaders into financials, industrials, healthcare or other sectors would reduce the impact of falling technology valuations on the broader market.
Midterm Weakness as an Entry Point
U.S. equities could still correct ahead of the midterm elections. Citi does not view such a move as a reason to cut exposure. Historically, weakness before midterms has frequently been followed by stronger performance toward year-end. Citi therefore recommends using a meaningful pre-election decline to increase equity positions.
The positioning is straightforward:
market pullback → add U.S. equity exposure → maintain positioning for a year-end recovery.
The recommendation is conditional rather than a call to chase stocks. A correction becomes attractive while earnings revisions remain supportive, liquidity continues to improve and market stress stays contained.
Where the Call Could Fail
A broader deterioration in earnings would change the setup. The key risk is that weakness in AI-related stocks spreads beyond a valuation reset and begins to affect corporate profit expectations across the market.
A reversal in liquidity conditions would create a second problem. If tighter financial conditions coincide with falling earnings estimates and broader selling across sectors, the case for adding exposure on weakness would weaken.
Citi sees AI-related volatility as a rotation risk, not evidence of a broader equity downturn. The bank remains Overweight equities, favors the U.S. and would use a pre-midterm correction to add exposure rather than reduce it.
Marina Lubimova
