Citigroup strategists cut US equities, global tech, and European tech to neutral from overweight, and raised Europe excluding the UK to overweight.
The call followed a brutal stretch for AI-linked stocks after the Democratic sweep in the US midterm elections, as worries about tighter AI regulation handed the S&P 500 its steepest weekly drop since April 2025 and wiped $2.3T off the Nasdaq 100 in Thursday's session alone. Europe's Stoxx 600 finished the week 0.2% higher.
The damage was concentrated in one session. The Nasdaq Composite dropped 5.5%, its worst day since April 2025, while the Nasdaq-100 sank 6.36%. The S&P 500 lost 4.36% and the Dow fell 3.44%, extending a tech selloff that had been building for weeks.
Tech Took the Worst of the Selloff
Index move in the selloff session, %
Bar chart. Move (%). Nasdaq-100: One-day move (%) -6.36%. Nasdaq Composite: One-day move (%) -5.50%. S&P 500: One-day move (%) -4.36%. Dow: One-day move (%) -3.44%.
Source: City AM
Forward price-to-earnings on the Nasdaq-100 has fallen from roughly 30x a year ago toward 19x to 20x now, the lowest since October 2022 and about 24% below January's peak.
Citi wants cleaner positioning before buying tech again
The bank stayed constructive on artificial intelligence over the medium term, but sees room for more selling first.
Strategists led by Beata Manthey flagged the risk that investors flip from roughly neutral on the Nasdaq to betting outright against it. Citi estimates another 5% drop would be needed for positioning to turn properly negative.
The team wants steadier AI sentiment and firmer earnings revisions before rebuilding an overweight. Credit spreads have widened and earnings revisions have slowed, though falling oil prices, lower bond yields, and resilient economic data cut the other way.
Europe gets the upgrade because it owns less AI
Europe's upgrade rests on what its indexes don't hold.
The region's mix of industrials, banks, and defensive names left it less exposed to the AI unwind, and it benefits more from cheaper oil. Goldman Sachs strategists put AI infrastructure at about 15% of the Stoxx 600 and less than a quarter of the 9% earnings growth expected for the benchmark in 2027. Those stocks make up some 40% of the S&P 500 and more than two-thirds of next year's projected earnings growth. Across the eight largest AI-led selloffs since 2023, Europe outperformed the US every time, the Goldman team said.
Citi's sector stance is now a barbell of cyclicals and defensives, with healthcare upgraded to overweight alongside materials, and food and beverage lifted in Europe. Defensives have already outperformed cyclicals by 15% over the past month, a rotation Manthey calls a steady market, violent rotation.
The bank kept its year-end S&P 500 target at 8,100 and sees emerging markets and Japan offering the most upside into 2027. Citi expects global earnings growth to slow by about 20 percentage points in 2027, and global stocks in similar years have historically risen about 4%.
