Having staved off several crises already this year, ranging from the tariff war to recession fears and rising bond yields, Citigroup thinks the S&P 500 will see the current one off too.
The rule of thumb is that markets generally discount geopolitical risks quickly, if there’s no corresponding – and sustained – spike in oil prices, said a team of Citi strategists led by Dirk Willer in a note to clients on Friday. They believe events in the Middle East will only temporarily impinge on risk assets, and as worst-case scenarios have been averted so far, are retaining a positive bias toward equities.
Citi’s phlegmatic response to the Israel-Iran conflict is predicated on the assumption that there is enough spare capacity in the oil market to prevent the risk premium remaining elevated for an extended period. The bank’s energy strategists expect Brent (BRN00) to continue trading in a $70-80 per barrel range, and their research suggests the S&P 500 SPX is typically unaffected by such events.
Having upgraded U.S. equities to overweight in a prescient call on April 9, Willer and his team are sticking with their 6300 year-end call for the S&P 500, but believe a bullish scenario, in which tariff and growth fears dissipate, could produce a level of 7000. Valuations are a factor but on balance, the team believes the S&P 500’s forward price-earnings multiple of 21 times can be held. Tech QQQ remains the preferred sector as the AI theme is still germane.
Their bullish view on stocks is offset by an underweight recommendation for duration – fixed-income instruments with longer maturities.
Spring witnessed a scare for various government bond markets, particularly the U.S and Japan, as outsized fiscal deficits made long duration bonds unappealing. Central banks alleviated the pressure at the long end of their curves by switching to more short-term issuance, but as Citi points out, this merely addresses the symptoms of unsustainable government spending rather than addressing its root cause.
Willer and his team acknowledge that this bearish stance on U.S. Treasurys is a tactical rather than structural call and will likely be adjusted once the Fed starts to change its monetary bias.
Within government bond markets, Citi swapped its underweight in U.K. government bonds known as gilts BX:TMBMKGB-10Y for Japanese government bonds BX:TMBMKJP-10Y, but stays constructive on German bonds BX:TMBMKDE-10Y known as bunds.
Outside of equity and bond markets, Citi’s stance in credit and commodities is neutral, but it persists with a bearish view on the dollar versus the euro as the rates differential – higher U.S rates by rights should attract more buyers – has broken down as a driver.
The currency viewpoint informs Citi’s overweight position in European equities, boosted by the business cycle and Germany’s planned increase in government spending. Citi is not overly concerned about outflows from the $50 trillion U.S. equity market but make the point, this diversification has a disproportionate influence on smaller European markets.
