Citi strategists have closed their positive view on hyperscalers and growth stocks after a rotation into value. Citi's head of equity trading strategy says the call has not worked, though the bank keeps favoring strong balance sheet stocks.
Citi strategists threw in the towel on one of their main trades: being long hyperscalers and growth stocks. Stuart Kaiser, head of Citi equity trading strategy, said in a weekend note that his prediction of gains for many AI-focused equities has not worked.
Kaiser had bet on a well-received earnings season and light positioning by investors. Instead, the market rotated out of many big technology growth plays and into perceived value stocks, he observes. Citi's tactical basket of growth equities lagged its value basket by 4.1% last week and by 32% over the past month.
Consequently, the S&P 500 shed 1.9% last month, while hyperscalers lagged by 8.7%, according to Citi.
Disappointing earnings trigger the rotation
Kaiser said such a rotation needed a catalyst, and disappointing earnings supplied it. In his view, headline earnings per share growth numbers may look good but in many cases fell far short of a high bar, with guidance muted relative to recent history.
He drew a line under the trade in plain terms. According to Kaiser: "We close down our positive views on hyperscalers and growth".
Citi keeps its bet on strong balance sheets
However, Citi remains long strong vs. weak balance sheet stocks and continues to see health care AI as the best option for growth. After the midterm elections, Kaiser said, Citi is hopeful for relief in areas like power generation, but uncertainty is too high to pursue that yet.
Kaiser acknowledged that the market has been able for some time to overcome rising energy costs, higher bond yields and wider credit spreads. But Citi would keep equity exposure in strong balance sheet and larger cap stocks for the time being, because disappointing earnings may not be enough to balance active credit, policy and oil risks.
Source: MarketWatch
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