Citibank analysts expressed a positive outlook for U.S. equities, setting a base case target for the S&P 500 at 6500 by the year 2025. This projection is based on the expectation of mid-single digit gains following two consecutive years of over 20% returns.
Citibank's forecast hinges on the potential of a soft economic landing and the benefits of artificial intelligence, as well as the influence of policies from the Trump administration.
The analysts believe that the S&P 500's performance will not directly mirror the broader U.S. economy due to its composition and the specific impacts of federal policies. They anticipate that the market will continue to recover from the global recession caused by the pandemic, with increased volatility expected in the upcoming year.
Citibank highlights the ongoing importance of mega-cap growth companies, which have been significant drivers of the S&P 500's returns.
However, there is an emerging trend of earnings growth converging towards small to mid-sized companies, value stocks, and specific industry groups or sectors, presenting new trading opportunities.
With the Federal Reserve's expected interest rate trajectory leading to a higher rate environment compared to the period after the Global Financial Crisis, U.S. equities have demonstrated resilience, suggesting that a "higher for longer" rate scenario may not be detrimental to the market.
The focus on profitability and productivity improvements remains central to the fundamentals and valuation of equities. Citibank emphasizes that, given the current valuation starting point, confidence in earnings growth through operating leverage is crucial for investors.
Citibank also identifies thematic fundamental tailwinds that could provide single stock and tactical alpha opportunities amidst expected higher volatility. Artificial intelligence and Trump policy are highlighted as examples.
The firm's thematic strategy framework has shown that market cap-weighted mega-cap stocks, referred to as the "Magnificent 7," returned nearly 48% in 2024, contributing significantly to the S&P 500's overall performance.
The valuation of these mega-cap stocks differs considerably from the rest of the index, and while high by historical standards, it is essential to consider their earnings growth trajectories. Price-to-earnings growth (PEG) ratios suggest that multiple expansion has occurred alongside rising fundamental growth expectations.
Lastly, Citibank's key sentiment indicator, the Levkovich Index, has entered a state of Euphoria. Equity Mutual Funds and ETFs have seen steady outflows in the years 2022 and 2023, indicating a risk-off positioning by investors.
However, in 2024, there was a significant positive shift in equity fund flows, particularly in ETFs, later in the year.
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