Citi has downgraded its outlook for U.S. equities from Overweight to Neutral, attributing this decision to growing uncertainty in macroeconomic conditions, elevated valuations, and increasing pressures on expected earnings. Despite some recovery from recent tariff risks following President Trump’s 90-day pause on trade tariffs, significant economic drag remains.

Key Highlights

• Valuation Concerns: U.S. equities are currently trading near the 80th percentile of historic valuation multiples.

• Citi’s proprietary Earnings Revision Index dropped to levels marking recessionary fears, reflecting -40%, which indicates substantial downgrade risks.

• The bank forecasts global earnings growth at only 4%, falling short of the 10% expected growth based on a bottom-up analysis.

Tariff Impact on Equity Performance

• Expected Effects: Existing tariffs may pull the MSCI All-Country World Equity Index EPS growth down by six percentage points this year.

• Citi indicates these dynamics might undermine the U.S. market’s overall performance, hinting at potential “cracks in the U.S. exceptionalism story.”

Regional Reallocations

• Japan: Upgraded to Overweight due to attractive valuations—trading at the 15th percentile over the past 25 years—and lower risks of U.S. trade conflict.

• United Kingdom: Also raised to Overweight, benefiting from inexpensive valuations amidst ongoing volatility.

• Continental Europe: Maintains an Overweight rating due to fiscal stimulus effects and anticipated ECB rate cuts.

Outlook for the Market

Citi’s findings underline that while there may be a short-term upside due to reduced trade tensions, the broader U.S. equity market remains vulnerable to further economic challenges and earnings revision shifts.

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