‘We are impressed:’ Citi recommends buying next stock market dip with hot AI trade still coming ahead
Some retail investors live by the three-word phrase “buy the dip” since they bet the stock market will climb again after a period of losses lasting hours, days, or even weeks. Add Citi to the roster of believers in buying the next dip.
Citi analysts believe the stock market has proved unusually resilient against significant headwinds, particularly from higher energy prices resulting from the Iran war.
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“We are impressed how well the equity market has been trading in the light of higher oil, higher rates, and poor seasonals in Sep, even at a time when volatility in US rates is rising,” Citi said in a research note to clients published Sept. 25.
Citi recommended to “stay the course” and it expected a stock market drop in the run-up to the Nov. 3 midterm election. It added it was waiting for “a pull-back to add more risk because a pullback is typical after a first Fed hike (rather than before) and because the market also tends to pull back into the midterms before the typical year end rally takes over.”
‘The AI trade will continue’
Citi said U.S. equities will remain attractive since the AI buildout is only gathering momentum.
“We prefer the US as we still believe that the AI trade will continue. Emerging Asia is the other candidate, and an attractive candidate when the time comes to add more risk,” Citi analysts said. “The US is also more insulated from renewed oil upside.”
Other financial analysts are also keeping track of emerging economies in Asia. J.P. Morgan recently pointed to the Indian stock market as a “safe haven” for AI-exposed portfolios. Indian companies are undergoing a period of remarkable growth, and the Indian stock market hasn’t been taken over by explosive growth from the AI boom like Wall Street.
Citi analysts observed that U.S. equities have managed to “decouple” economic concerns from the ongoing Iran war, which has set off inflation that’s most visible in diesel and gas prices. It did issue an optimistic forecast on when the Strait of Hormuz, the vital commercial shipping lane, will reopen and predicted oil prices drifting down to $70 per barrel by the fourth quarter.
“Short term stress is still very plausible, even as by the end of the year, the [Strait of Hormuz] is likely to be open for business again,” Citi said.
A stock market dip before November?
Citi is forecasting a stock market dip ahead of the midterms, citing also that the Federal Reserve hiked rates for the first time in three years on Sept. 16. It referred to it as “indigestion” among stock market investors.
“We have noted in the past that there is typically a pullback ahead of the midterms,” Citi said. “This is usually an opportunity to buy as the year-end performance tends to be quite strong. We would add risk on a dip, while keeping an eye on Iran.”
Indeed, investors tend to zero in on political risks when one major political party is at risk of losing one or both chambers of Congress. The S&P 500 has shed 5% or more in the two months leading up to November in 15 of the 24 midterm years stretching back to 1930, according to a Cantor Fitzgerald analysis cited by Reuters.
Stocks across major indexes have taken losses in recent weeks, partly due to volatility in the bond market with multiple yields hitting multi-decade highs.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
