Citi has reduced its tactical investment recommendations for US equities and technology stocks, citing concerns about investor positioning and weakening sentiment towards artificial intelligence, while upgrading its outlook for European shares outside the United Kingdom.
The bank downgraded US equities, global technology stocks and European technology stocks from Overweight to Neutral. At the same time, it raised its recommendation for European equities excluding the UK to Overweight.
The changes follow recent declines in global equity markets, with technology shares experiencing particularly pronounced selling pressure as investors reassess expectations for AI-related investment.
AI Sentiment and Investor Positioning Influence Downgrades
Citi said global equity markets have declined following an unusual period in which major indexes remained relatively stable despite substantial shifts in investment between sectors.
Although technology stocks have experienced the largest losses, volatility has subsequently spread across other parts of the market.
The bank identified the possibility of further reductions in investor exposure as a principal reason for lowering its recommendations.
Citi warned that positioning in the Nasdaq could move from approximately neutral to net short, indicating that bearish positions would exceed bullish exposure.
According to its estimates, a further market decline of around 5% would be required for positioning to become decisively negative.
The bank suggested that uncertainty surrounding artificial intelligence investment could continue influencing market sentiment in the near term.
Citi Maintains Medium-Term Confidence in Artificial Intelligence
Despite reducing its exposure recommendations, Citi emphasised that its longer-term assessment of artificial intelligence remains favourable.
The bank said it would prefer to see more stable investor sentiment, improved positioning and consistent earnings revisions before restoring its previous Overweight recommendations.
“We remain constructive on AI over the medium-term but would look for cleaner positioning and more stable AI sentiment (along with steady EPS revisions) before reestablishing our Overweight call,” Citi wrote.
The distinction indicates that the bank’s tactical changes are primarily related to near-term market conditions rather than a fundamental reversal of its expectations for AI development.
Citi also noted that the results of the US midterm elections had contributed to uncertainty about the longer-term direction of spending on artificial intelligence infrastructure.
Credit Spreads and Earnings Revisions Add to Market Uncertainty
Citi identified widening credit spreads and slowing earnings revisions as additional factors affecting the investment environment.
Wider credit spreads indicate that investors are demanding greater compensation for holding certain debt securities, potentially increasing financing costs for borrowers.
At the same time, a slowdown in earnings revisions suggests that the pace of changes to corporate profit expectations has moderated.
However, the bank also identified developments that could provide support for financial markets.
Oil prices and government bond yields have declined, while economic data has remained relatively resilient.
“The investing environment remains tenuous, but risks appear balanced, rather than significantly skewed to the downside,” Citi said.
The bank’s assessment suggests that although market conditions remain uncertain, it does not currently view the balance of risks as predominantly negative.
Global Earnings Growth Expected to Slow in 2027
Citi forecasts that global corporate earnings growth will decelerate by approximately 20 percentage points in 2027.
The bank examined previous periods characterised by comparable slowdowns and found that global equities recorded average gains of approximately 4% during those years.
Defensive companies and businesses with higher-quality financial characteristics generally outperformed during similar periods, according to Citi’s analysis.
The historical comparison provides context for the bank’s current preference for a combination of cyclical and defensive sectors.
However, previous market performance does not establish how equities will behave during the anticipated slowdown.
European Equities Upgraded on Lower Technology Exposure
Citi raised its recommendation for European stocks excluding the United Kingdom to Overweight, citing the region’s comparatively lower exposure to technology shares.
The bank also identified declining oil prices as a potential advantage for European equities.
Lower energy costs can reduce operating expenses for some businesses and provide support for economic activity, although the effects vary across industries.
Citi’s assessment suggests that European markets may be relatively less sensitive to changes in AI-related investment sentiment than the US equity market.
The upgrade represents a shift in the bank’s regional allocation preferences rather than a prediction that European shares will necessarily outperform.
Materials, Healthcare and Food and Beverage Receive Overweight Ratings
Alongside its regional changes, Citi adjusted its sector positioning to incorporate both economically sensitive and defensive industries.
The bank maintained Overweight recommendations for materials and healthcare stocks.
Materials companies provide exposure to economic and industrial activity, while healthcare businesses can offer different earnings characteristics during periods of slower growth.
Within Europe, Citi also upgraded the food and beverage sector to Overweight.
The changes indicate a preference for diversification across sectors with different economic sensitivities as the bank prepares for slower global earnings growth.
Citi Adopts More Balanced Regional and Sector Strategy
Citi’s latest allocation changes reflect caution towards near-term AI sentiment and the possibility of further reductions in technology investor positioning.
The bank remains constructive on artificial intelligence over the medium term but is waiting for more stable sentiment and earnings expectations before increasing its recommended exposure.
Its preference for European equities outside the UK reflects the region’s lower technology concentration and potential benefits from declining energy prices.
With global earnings growth expected to slow in 2027, Citi is combining cyclical and defensive sector exposure while monitoring market positioning, credit conditions and corporate profit forecasts.