Citigroup has joined the bullish camp on Wall Street, upgrading its rating on US equities while simultaneously downgrading its view on emerging market stocks. This adjustment reflects a divergence between the resilience of technology earnings and the risks posed by energy market shocks.
On Monday, Citigroup raised its rating on US stocks from "Neutral" to "Overweight," citing three primary reasons: valuations have become more reasonable following a recent market pullback; the technology sector's contribution to global earnings growth continues to expand, with expectations that it will account for approximately half of all global earnings growth; and anticipated de-escalation in the Middle East has somewhat reduced the tail risk of oil-driven inflation.
The S&P 500 index has rebounded nearly 9% from its seven-month low at the end of March. Strategists at Citigroup noted that after a repricing, the premium of US stocks compared to developed markets outside the US is now near its historical average, enhancing their valuation appeal. On the same day, BlackRock's Investment Institute also upgraded its rating on US stocks, with several institutions expressing a preference for US equities over other global assets.
In contrast, Citigroup downgraded its rating on emerging market equities to "Neutral" and issued an "Underweight" rating on the global communication services sector. The persistent risk of energy shocks, which continues to weigh on emerging market performance, was a key factor in these rating adjustments.
The research report emphasized that while earnings per share are projected to grow across all global sectors by 2026, approximately 50% of this growth is expected to originate from the technology sector. This highly concentrated earnings structure underpins the core rationale for favoring US stocks—the increasing weight of US technology companies in global earnings growth provides US markets with a structural advantage in global asset allocation.
Simultaneously, the emerging market equity rating was downgraded to "Neutral." The report pointed out that many emerging market economies are highly sensitive to physical energy shortages. Conflicts involving Iran, which have pushed oil prices higher, exacerbate inflationary pressures, worsen external accounts, and increase the risk of capital outflows for energy-importing nations. The MSCI Emerging Markets Index has declined 2.8% since the outbreak of recent conflicts.
A strengthening US dollar has further amplified these pressures, presenting an additional headwind for emerging market assets. Notably, Citigroup raised its year-end target for the MSCI Emerging Markets Index from 1540 to 1770, indicating that the medium-term outlook for emerging markets is not entirely pessimistic, but near-term risk factors remain dominant.
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