By Senad Karaahmetovic
Citi is growing increasingly cautious about U.S. stocks after the S&P 500 rallied to exceed the bank’s 4200 year-end targets.
The magnitude of the ongoing relief rally, as well as the earnings risk, create “a valuation headwind”.
“Further upside would most likely be driven by repositioning, a function of investor bearishness headed into this recent move,” Citi U.S. equity strategist Scott Chronert told clients in a note.
However, Chronert also believes it is “justified” to sell into the further strength at an index level.
“We think the risk/reward becomes skewed to the downside as 1H23 recession risk means lower earnings and, thus, higher multiples,” the strategist added.
At this point, the strategist sees a higher chance of a 1H23 recession than a soft-landing scenario. Citi sees the S&P 500 at 3650 in case of a mild recession and 4700 if the Fed manages to deliver a soft landing.
“Tactically, selling further strength aligns with our index target. Alternatively, our preferred approach is to focus incrementally on sector/stock positioning. Here, we lean toward growth, with an emphasis on quality and structural fundamental tailwinds,” Chronert concluded.
The S&P 500 closed at $4,305.20 yesterday.