The rally in US stocks is showing signs of exhaustion, and investors should be ready to buy any dip, according to Citigroup strategists. Currently, 19 of 24 industry groups are at or near overbought levels, according to a team including Scott Chronert in a note. “The message is to wait for corrections and buy during them,” they point out.
The rally in the U.S. stock market since late October has intensified on optimism that the Federal Reserve will begin cutting interest rates next year as the economy avoids a serious slowdown. However, the gains have turned extreme by some measures, with the S&P 500 Relative Strength Index showing at one point that the benchmark was at its most overbought level since 2020.
Signs of a correction are beginning to be seen after the S&P 500, Nasdaq 100 and Russell 2000 fell on Wednesday, with all three indices no longer overbought according to their RSI. Some in the market speculated that the expiration of day-specific options traded on Wednesday helped facilitate selling, as traders sold more to rebalance their positions before expiration. US stock futures are rising on Thursday.
Chronert expects the S&P 500 to finish next year at the 5,100 level, up 8.5% from Wednesday’s close, supported by “steady” growth in sector-level earnings and a broadening of the rally beyond technology mega-companies.
In this context, technology and industrial sectors are among the positions overweighted by the strategist. He also upgraded banks to overweight due to attractive valuations and surprisingly strong fundamentals, while the retail and durable goods sector also becomes overweight as consumer concerns may increasingly be reflected in prices.
This optimistic view of Citi’s stock analysts, who got their 2023 predictions right, is not over as they predict more gains ahead. His technical colleagues, including Hong Li in a separate note, also warned against chasing the equity rally at risk, “given the fragile nature of the recent volatile rotation.”
They still prefer growth by early 2024. Chronert noted that soft-landing sentiment and optimism about lower interest rates helped lift the stock market this year-end. “The implication is to expect volatility ahead, but with an eventual Fed shift as the guiding star,” she notes.
The bank’s “base case” sees the benchmark S&P 500 (.SPX) ending 2024 at 5,100 points, an 11% increase from current levels, according to Chronert and his team in their year-end outlook report. The index is up more than 20% in 2023, led by mega tech companies and growth stocks, but “a broadening beyond the leadership of 2023 growth stocks is necessary for further gains in the S&P 500,” he argues. .
“On balance, we are positive on U.S. stocks based on improving earnings growth, even as recession risk remains,” Citi strategists said in their report, projecting a 10.4% rise in earnings per share. of the S&P 500 in 2024. Strategists said they expected greater volatility but that “investors should be prepared to buy during pullbacks,” they recall.
“Our view is that the valuation of GDP with S&P 500 earnings per share growth is lower than perceived, as the underlying economic sensitivity built into the construction of the index has reduced over the ‘recent decades,'” Exhibit the signature on the report.
Citi also said election problems “will become apparent” as the year progresses. “Our concern is that fiscal containment will enter the picture in 2025 either through higher tax proposals or lower spending as debt ceiling issues resurface,” the strategists said in their report.
