Citi's Bold Bet: U.S. Equities Surge Amid AI Boom and Geopolitical Tensions

Citi's Global Head of Macro and Asset Allocation, Dirk Willer, maintains an optimistic outlook for U.S. equities amid ongoing Middle Eastern geopolitical tensions, asserting that the burgeoning AI sector will continue to bolster investor enthusiasm. In the June global asset allocation report, Willer emphasized the sustained over-allocation position on stocks, including U.S. equities, citing the surge in AI-related trading.

The Citi report highlights that recent geopolitical developments, particularly in the Middle East, have not substantially diminished risk appetite. Analysts suggest that even if oil prices experience a sharp rise, the impact on U.S. equities will likely be short-lived, thanks to abundant global spare capacity. Willer sees potential buying opportunities in the event of pullbacks, stating, "We are prepared to add to stock holdings if risk assets are impacted by higher oil prices."

Citi currently maintains a +1 overweight rating on global equities, driven by strong performances in tech stocks and positive sentiment around AI innovation. The firm has recently elevated the S&P 500 end-year target to 6,300 points, with 7,000 points possible in bullish scenarios, primarily due to the easing of tariff concerns and alleviated growth anxieties.

In a strategic move to capitalize on emerging markets within Asia, Citi has reduced its overweight position in European stocks. Willer acknowledges the dominance of U.S. tech stocks, which poses challenges for Europe to achieve superior returns. Historical trends reveal that Europe outperforms the broader market only 30% of the time when U.S. tech stocks are leading.

Industry-wise, Citi is overweight in technology, communication services, banking, and utilities sectors while underweight in real estate, consumer discretionary, industrial, and materials sectors. Despite concerns over U.S. stock valuations, recent market corrections have "reset the clock," mitigating short-term peak risks. The U.K. remains one of Citi's least favored markets.