Citigroup has shifted to neutral on U.S. equity risk, warning that a slowdown in AI model development could crimp earnings forecasts. The call comes as Nasdaq 100 futures led early Monday declines after AI industry leaders urged a pause in advancing model capabilities, dragging chip stocks lower while software names gained.
Nasdaq 100 futures lost 458.75 points, or 1.56% at 6:47 a.m. ET on Monday, leading declines across major U.S. indexes after top AI executives called for a slowdown in developing the technology, citing safety concerns. S&P 500 E-minis shed 51.75 points, or 0.68%, while Dow E-minis fell a smaller 0.15%.
Chipmakers lead the selloff
Nvidia fell more than 2% in premarket trading, and Amazon lost 1%. Chipmakers took the heaviest hit: Intel, AMD and Marvell Technology dropped 5.5%, 5.1% and 7%, respectively. Software stocks moved the other way, with ServiceNow, Adobe and Workday up 4.3%, 2.4% and 2.6%.
The trigger was a weekend call from Anthropic CEO Dario Amodei urging AI companies to slow the pace of advancing model capabilities. Elon Musk and OpenAI CEO Sam Altman said they agreed. Some investors pushed back: Michael Burry posted on X that the warnings were an attempt by major players to stifle smaller competitors, and Annex Wealth Management's Brian Jacobsen also questioned whether the statements were credible.
Citi turns cautious on the AI trade
Citigroup used the moment to cut its outlook. According to a Citi team led by Stuart Kaiser, in a note to clients Sunday night: "We shift to neutral on U.S. equity risk." The strategists said a potential slowdown in AI model development could crimp earnings-per-share revisions, since much of the S&P 500's nearly 12% gain this year has been driven by optimism tied to AI investment.
Kaiser's team also cited November's midterm elections and sharply higher bond yields and oil prices as cross-asset headwinds. They said they would hedge against further weakness through put options on the Nasdaq-100-tracking QQQ or the VanEck Semiconductor ETF.
A market stuck in a range
Citi noted that last week's 0.8% drop in the S&P 500 was the index's biggest weekly decline since the week ending Aug. 21, driven by macro risks without earnings to offset them. The strategists expect the S&P 500 to stay within 2% of its August highs in either direction, keeping investors on the sidelines; a drop of around 3% to 5% could draw in some dip buyers, but they said markets would need to test all-time highs to trigger a chase.
Traders were pricing in a nearly 89% chance of a Federal Reserve rate increase, with sentiment already weighed down by data last week showing U.S. inflation accelerating. Citi still expects markets to keep rallying on a limited pace of two or three rate hikes, backed by strong earnings growth and solid labor markets.
Sources: MarketWatch, Reuters via Investing.com
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