Citigroup Downgrades U.S. Stock Market Rating Citing Trade War Uncertainty

Citigroup's equity strategists have joined their peers on Wall Street in adopting a more cautious stance on the U.S. stock market. The strategists have downgraded their rating for the U.S. stock market, citing concerns that the ongoing trade war is hampering economic growth and corporate earnings. This shift in sentiment is driven by the uncertainty surrounding the ultimate outcome of President Trump's trade policies, which has raised fears of a potential economic downturn. The strategists noted that investors are still overinvested in U.S. equities, which could lead to a significant outflow of capital as investors seek diversification in other asset classes.

The move by Citigroup's strategists aligns with similar adjustments made by other major Wall Street firms. These firms have also expressed concerns about the impact of the trade war on the U.S. economy and have advised investors to consider alternative investment opportunities. The strategists at Citigroup highlighted that the rationale for capital to exit the stock market and seek diversification is strengthening. This sentiment is echoed by other analysts who have pointed out that the economic growth and earnings outlook for U.S. companies has become increasingly uncertain due to the trade tensions.

Beata Manthey, leading the team, stated that the cracks in the "American Exceptionalism" narrative will persist. Factors such as the emergence of DeepSeek artificial intelligence models, European fiscal expansion, and escalating trade tensions will disproportionately impact U.S. companies compared to their Japanese and European counterparts. This has led to a downgrade in the U.S. stock rating from overweight to neutral. The strategists noted that the drivers of the "American Exceptionalism" narrative, whether viewed through GDP or earnings per share, are fading. The U.S. market remains relatively overvalued, and earnings per share are being revised downward.

Citigroup's strategists have revised their target for the S&P 500 index for the end of the year, lowering it from 6,500 points to 5,800 points. This adjustment reflects the growing pessimism among market participants about the near-term prospects for U.S. equities. The strategists emphasized that the economic data and corporate earnings reports have not been as robust as initially expected, further fueling concerns about the market's resilience in the face of ongoing trade disputes.

Scott Chronert, the head of U.S. equity strategy at Citigroup, has also lowered the year-end target for the S&P 500 index from 6,500 points to 5,800 points, suggesting an 8% upside from the previous week's closing price. He has reduced the earnings forecast for the index from $270 to $255 due to tariff-induced volatility and signs of slowing economic growth.

Manthey and her team have upgraded their rating for the Japanese stock market from underweight to overweight, citing lower valuations and potential tariff exemptions. They maintain an overweight stance on European equities, noting that a 20% tariff has already been priced in, and fiscal stimulus and policy easing will provide support. Additionally, they have upgraded their rating for U.K. equities to overweight due to lower valuations.

The predictions by Manthey and Chronert differ from those of Citigroup's macro strategists, who upgraded their ratings for U.S. and European equities to overweight following President Trump's announcement of a 90-day delay in implementing tariffs. This divergence in views highlights the complexity and uncertainty surrounding the current trade environment and its potential impact on global markets.