Citi and Goldman Sachs Sound Caution: U.S. and China Stocks Under Pressure Amid Global Uncertainty

Global Investment Strategies Are Shifting as Trade Tensions and Economic Risks Mount

Leading global investment banks Citi and Goldman Sachs have issued fresh updates on global equity markets, warning investors of increasing macroeconomic risks, rising trade barriers, and weakening earnings expectations. These updates suggest that both U.S. and Chinese equities face significant challenges, while other markets like Japan and the U.K. may offer better opportunities in the current environment.

Citi Downgrades U.S. Stocks Amid Valuation and Earnings Concerns

Citigroup has downgraded U.S. equities to Neutral from Overweight, signaling a more cautious stance due to multiple red flags in the American market. According to Citi analysts, U.S. stock valuations remain elevated—currently around the 80th percentile compared to historical averages—despite ongoing economic uncertainty.

Earnings Warnings and Recession Risks

Citi proprietary Earnings Revision Index has hit -40%, a level typically associated with recessionary trends. The bank’s strategists warn that downward revisions in corporate earnings are likely to continue, especially if macroeconomic indicators do not improve.

While a 90-day pause in tariffs by President Donald Trump has temporarily eased some fears, Citi believes that existing trade duties still pose a major risk. The impact of tariffs is expected to weigh heavily on U.S. company earnings per share (EPS), making American stocks more vulnerable in the months ahead.

Japan and the U.K. Upgraded: Value and Stability Gaining Favor

As part of its regional reallocation, Citi upgraded Japan and the United Kingdom to Overweight.

Japan: Attractive Valuations and Lower Trade Risk

Japanese equities are currently trading near their 15th percentile valuation over the past 25 years. This makes them one of the cheapest developed markets globally. Citi believes Japan is well-positioned to avoid harsh U.S. trade measures through bilateral negotiations, giving it a potential edge over other export-heavy markets.

Additionally, the Japanese market has already priced in weak earnings expectations, offering a more stable risk-reward profile for investors.

U.K.: Defensive Appeal in Volatile Times

The U.K. has also been moved to Overweight due to its relatively low valuations and defensive sector composition. According to Citi, U.K. stocks could provide downside protection if global volatility continues, particularly because of their exposure to stable industries like utilities and consumer staples.

Europe Still in Favor, EM and China Lose Momentum

Europe Supported by Stimulus Expectations

Citi has maintained its Overweight position on continental European equities. The region is expected to benefit from fiscal stimulus measures and possible rate cuts from the European Central Bank (ECB). These factors could support earnings growth in the near future, despite global headwinds.

Emerging Markets and China Downgraded

On the other hand, both U.S. and emerging market (EM) equities have been downgraded. EM stocks, especially those in China, are struggling with the weight of persistent tariffs and slowing economic activity.

Goldman Sachs Cuts China Outlook Again

Goldman Sachs has slashed its forecast for Chinese stocks for the second time this month, citing growing trade tensions and weaker growth indicators. The bank now expects the MSCI China Index to reach 75 in 12 months, down from a previous target of 81. The CSI 300, another key Chinese index, was revised down to 4,300 from 4,500.

What’s Dragging China Down?

Several factors are behind the downgrade:

A sluggish 4% GDP growth rate

High fiscal deficit (14.5% of GDP)

A depreciating Chinese yuan

Escalating trade restrictions from the U.S.

Goldman Sachs believes China must act boldly to offset these pressures. This includes increasing public spending, loosening industry regulations, and pushing through structural reforms.

The analysts also suggest that China should reduce its reliance on the U.S. by diversifying trade partners and encouraging domestic investment into its equity markets to maintain confidence.

UBS has cut its forecast for China’s economic growth in 2025 to 3.4%

UBS has cut its forecast for China’s economic growth in 2025 to 3.4%. This change is based on the assumption that current U.S. tariffs will stay in place and that China will introduce more stimulus measures. Just a few weeks ago, UBS was expecting 4% growth for China next year. Meanwhile, China’s official goal remains around 5%. UBS also believes that China’s exports to the U.S. could drop by nearly 66% in the next few quarters, with overall exports shrinking by 10% in dollar terms this year. Looking ahead, if trade tensions continue, China’s growth could slow further to just 3% in 2026.

Sector Outlook: Tech, Financials, and Health Care in Focus

Citi global sector strategy continues to favor a balanced portfolio. Here’s their current preference:

Technology: Best positioned for long-term growth

Financials: Leading among cyclical sectors

Health Care: Top pick for defensive exposure

These sectors are expected to hold up better under macro uncertainty and policy shifts.

Volatility Expected to Stay, But Rebound Possible

Both Citi and Goldman Sachs acknowledge that market volatility is likely to continue due to ongoing policy shifts, trade negotiations, and economic slowdowns. However, there remains a silver lining: if trade talks, especially with China, show meaningful progress, there could be a strong rebound in global equities by year-end.

Citi projects a 12% potential upside for the MSCI All-Country World Index, setting a year-end target of 1050.

Final Thoughts

In a time of shifting economic narratives and political uncertainty, investors are being urged to re-evaluate their global portfolio allocations. With the U.S. and China facing downside risks, regions like Japan, the U.K., and continental Europe may offer better resilience. While challenges remain, a careful, sector-diversified approach may help investors weather the storm and benefit from any potential recovery ahead.