(April 14): Equity strategists at Citigroup Inc lowered their view on US equities, saying the case to diversify away from the asset class is strengthening as the trade war undermines economic growth and earnings.

Cracks in “US exceptionalism” will persist with the emergence of China’s DeepSeek artificial intelligence model, Europe’s fiscal expansion and rising trade tensions that will hit American companies harder than peers in Japan and Europe, a team led by Beata Manthey wrote in a note, downgrading US equities to neutral from overweight.

“The drivers of exceptionalism are fading, both from a gross domestic product and earnings-per-share perspective,” the strategists wrote. “The US market remains relatively expensive, while earnings per share downgrades are intensifying.”

The Citigroup strategists joined a band of Wall Street heavyweights including Bank of America Corp and BlackRock Inc that have turned cold on US equities as uncertainty about the endgame for President Donald Trump’s trade policies raise the spectre of a recession. Investors are still overweight on US stocks, leaving room for further diversification, the strategists wrote.

While the S&P 500 Index’s earnings-based valuation has dropped below the five-year average, it is still trading at 19.4 times of 12-month forward earnings compared with a ratio of 16.5 times for the MSCI World Index, according to data compiled by Bloomberg. 

In a separate note, Citigroup’s head of US equity strategy Scott Chronert reduced his year-end target for the S&P 500 to 5,800 from 6,500, implying an 8% gain from last Friday’s close. He slashed his earnings estimate for the index to US$255 from US$270 due to the tariffs turmoil and signs of slowing economic growth.

“The China tariff stand-off persists and provides its own level of drama, and concern,” Chronert wrote. “The goldilocks sentiment in place entering this year has given way to abject uncertainty.”

Manthey and her team double-upgraded Japanese equities to overweight from underweight, citing the Asian market’s cheap valuations and the likelihood of a tariff reprieve from the US. 

They maintained their overweight stance on Europe, saying the region’s stocks have fully priced in 20% tariffs, while fiscal stimulus and policy easing will provide tailwinds. Within the region, they upgraded the UK to overweight based on cheap valuations.

The strategists also downgraded emerging markets to underweight from neutral as they see China disproportionately affected by tariffs. Within the asset class, however, they stayed overweight on India, which is less exposed to trade duties, as well as Taiwan, Chile and South Africa.

The calls by Manthey and Chronert differ from those of the firm’s macro strategists, who last week upgraded US and European stocks to overweight after Trump issued a 90-day pause on tariffs.

Uploaded by Tham Yek Lee