(March 11): Citigroup Inc downgraded its view on US equities while upgrading China to 'overweight', another sign of the growing divergence in the outlook towards the world’s top two markets.

“US exceptionalism is at least pausing” for the coming few months, Citi’s strategists including Dirk Willer, its global head of macro research and asset allocation, wrote in a note on Monday, lowering their call on the nation’s stocks to 'neutral' from 'overweight'. A team at HSBC Holdings plc also cut US equities to 'neutral' on Monday, saying it sees “better opportunities elsewhere for now”.

“The news flow from the US economy is likely to undershoot the rest of the world in coming months,” Willer and his team wrote. The 'neutral' take on US stocks is over a three- to six-month time frame, and more negative US data prints are expected, they added.

Chinese shares look attractive even after their recent rally, the Citi strategists wrote, citing DeepSeek’s artificial-intelligence (AI) technology breakthrough, the government’s support for the tech sector, and still-cheap valuations.

Citi’s actions came as Wall Street witnessed another sharp sell-off on Monday, amid growing concerns that US President Donald Trump’s tariff hikes and spending cuts will hurt the US economy, which has hitherto defied naysayers with its strength and kept stock investors bullish.

For two years in a row, equity-market forecasters raised their expectations for the S&P 500 Index repeatedly to keep up with an inexorable rally. But just under three months into the year, many sell-side strategists have begun to moderate their rosy forecasts for 2025. The S&P 500 Index has lost 4.5% so far this year, after rallying more than 20% in each of the previous two years.

That’s quite a contrast with China, where equities have been on a tear this year. A gauge of Chinese stocks listed in Hong Kong has surged 20%, making it one of the world’s best-performing indices in 2025. It is set to beat the SPX this quarter by the most September 2007.

While Citi had been 'overweight' on American stocks since October 2023, Willer and his team in November cautioned US exceptionalism trades “may be at risk from an end to the Ukraine war”, though “it is too early to position for that”. They also said it was too early to position for Chinese equities’ outperformance despite potential local stimulus.

The divergence between the US and China is even more pronounced when it comes to technology stocks, as the recent emergence of an AI model from Chinese start-up DeepSeek proved to be a game changer that has spurred a re-rating of the sector in the Asian nation.

A Societe Generale SA’s basket of China’s seven tech heavyweights including Alibaba Group Holding Ltd has gained more than 40% this year, compared to an about 10% drop in an index of the Magnificent Seven stocks, whose slump has also pushed the Nasdaq 100 Index to the brink of a correction.

Another factor accelerating the shift away from US assets is the emergence of relatively cheaper alternatives in other parts of the world. For one, Germany’s plan to significantly raise spending is being hailed as a watershed moment in European policymaking, boding well for its assets. The European nation’s DAX Index has advanced almost 14% this year. 

While downgrading US stocks, HSBC strategists also upgraded European equities, excluding the UK, to 'overweight' from 'underweight', saying they expect eurozone fiscal stimulus to be “a potential game changer”.

Uploaded by Tham Yek Lee