Citi’s says S&P 500 is not currently in a bubble, and they are advising investors to consider buying on pullbacks. Despite the year-to-date surge of nearly 7% in the S&P 500, Citi emphasizes the importance of fundamental growth factors for sustaining market movement. Investors appear to be allocating funds based on anticipated future earnings growth.
However, Citi acknowledges that much has already been priced into the market, and while there may be a short-term overshoot of their year-end 5100 target, they are cautious about increasing the probability of their more optimistic 5700 bull case scenario. This scenario relies on a “goldilocks” macro environment and a 22x valuation multiple on a $260 index earnings projection, compared to their base case estimate of $245.
Despite their confidence in S&P 500 fundamentals, Citi recommends a cautious approach and prefers buying on pullbacks. They caution that the current surge in the market should not lead to overestimating future gains.
Addressing concerns about parallels with the tech bubble of the late ’90s, Citi points out that current valuation multiples are significantly lower than those observed during that period. The strategists believe that underlying market fundamentals have changed, differentiating the current situation from the late ’90s. However, they acknowledge the need for the current spending surge on general artificial intelligence (gen AI) infrastructure and products to translate into incremental revenue and growth drivers.
Citi also underscores the importance of market broadening for reaching new index peaks. While a few mega-cap companies have played a substantial role in propelling the S&P 500 to new highs, contributing to about half of the index’s gains, Citi highlights a significant increase in the number of stocks reaching 52-week highs. This suggests a broadening market, a factor Citi deems crucial for sustained upward momentum.
In summary, Citi maintains confidence in S&P 500 fundamentals but urges caution due to the rapid pricing of market expectations. Their preference for buying on pullbacks reflects a conservative stance, and they emphasize the importance of market broadening for long-term success, all while distinguishing the current market conditions from the tech bubble era.
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