As December approaches, investors eagerly await actionable trading recommendations from Wall Street strategists. This week, Citigroup's global macro strategy team delivered just that.
The strategists proposed a series of trades while making predictions about Fed rate policy and aluminum production. Among their recommendations was a leveraged bet that AI trading will continue driving the Nasdaq 100 higher. The team suggested investors buy out-of-the-money call options on the index expiring in December 2026.
They argued that as long as capital investment keeps growing and financial system liquidity remains ample, investors have enough time to ride the expanding AI bubble. "We believe the AI bubble could grow further through 2026," the team wrote. "Major sector rotations typically occur after bubble peaks, not before. While diversification may still help next year, tech stocks should remain part of long positions."
Regarding the rotation trades making headlines this month, Dirk Willer, Citigroup's global head of macro strategy and asset allocation, expects cyclical sectors like financials to prosper alongside tech stocks. The team described this not as simple rotation but rather a broad bullish market as the bull run enters its fourth year. They recommend overweighting financials and underweighting defensive consumer staples.
"Cyclical stocks should perform well in an environment of rebounding inflation," the team noted when discussing scenarios where both inflation and growth accelerate.
Citigroup's next theme carried a note of caution. Willer's team pointed out that U.S. stocks and bonds typically underperform in midterm election years, with weakness often appearing in Q3. This pattern becomes more likely when the incumbent party retains power.
To profit from Citigroup's prediction of rebounding global growth in 2026, the team suggested going long on copper - an "all-weather" trade somewhat insulated from U.S. domestic conditions. Investors could buy copper futures, call options on copper futures, or copper ETFs.
On the Fed, Citigroup remains skeptical that a Trump-appointed Powell successor would damage central bank independence. However, with rate cuts expected to continue, the team anticipates the Fed letting the economy run hot next year, potentially triggering inflationary pressures later in 2026. This could lead investors to demand higher term premiums for holding long-term U.S. debt, putting pressure on Treasury prices. (In bond markets, yields move inversely to prices.)
Finally, Citigroup recommended an intriguing cross-asset relative value trade: long AI equities versus short AI credit. While AI trading may continue lifting major indices like the S&P 500, credit default swap premiums on Oracle debt and other AI-linked bonds could keep climbing due to persistent credit risk concerns. Since most such debt remains investment-grade, the team suggests going long the S&P 500 while buying investment-grade CDS indices.
Comments