Citi equity have downgraded US and UK stocks to a neutral rating from overweight, while upgrading European stocks to overweight. Citi notes that European stocks are trading at a significant discount compared to US stocks and are pricing in a more reasonable earnings growth path. The strategists had previously upgraded US stocks last quarter but the strong year-to-date rally has led them to return to the sidelines.
Citi believes that megacap growth stocks are poised for a pullback, and there are still risks of a US recession. Citi sees a 5% earnings per share (EPS) contraction globally in 2023, followed by a modest 5% expansion in 2024 and expects a slowdown in EPS growth rather than a full recession, but note that risks to the outlook are more balanced now. In terms of sectors, the strategists recommend a portfolio focused on a mix of quality and selective cyclicals and have also downgraded the IT sector to neutral due to the potential pullback in megacap growth, but suggest being prepared to buy back on dips.
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