EPS recession is coming; Citi upgrades US equities, Tech to Overweight

March 31, 2023 8:14 AM EDT
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Citi equity strategists led by Beata Manthey are growing increasingly more positive on U.S. equities. The strategist raised the recommendation on U.S. stocks to Overweight from Underweight as this region tends to perform more defensively compared to other markets during times of EPS recessions.

“We think investors will continue to rotate into high quality Growth names,” Manthey wrote in a client note.

Citi also reaffirmed UK stocks as Overweight as valuation “still look cheap.” Strategists are less bullish on Europe and Emerging Markets, and Underweight on Australia and Japan.

As far as sectors are concerned, the EPS recession tends to reward defensive and high-quality growth names. Citi expects a ~5% global EPS contraction in 2023 and flat-to-slightly-up EPS in 2024.

“We raise IT to Overweight to reflect the change in market leadership towards quality. We downgrade Financials to Neutral (from Overweight previously), as lingering concerns over the Banks sector and tightening credit conditions could continue to weigh on sentiment. We Underweight key cyclical sectors, including Industrials and Consumer Discretionary,” Manthey added.

Overall, Citi expects global equities to remain range-bound to year-end, although a high degree of volatility should continue to be a dominant theme in the near term.

By Senad Karaahmetovic

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Citi, Senad Karaahmetovic