Citi is turning more bullish on U.S. stocks heading into the end of 2023. The firm moved U.S. equities to a tactical overweight rating in a Wednesday note, underpinned by seasonality, stable interest rates and positive earnings growth. “We have made a case for some time that the seasonals should not be ignored into year-end, especially if the S & P had a solid year until the end of October,” Dirk Willer, head of emerging market strategy at Citi Research, said. “With the January-October numbers now official – total return of 10.7% – the rule by itself would trigger a tactical buy signal into year-end.” The analyst added that he expects interest rates and a steady supply overhang “should at least stabilize rates in the short term,” further aiding equities. The note follows a move higher in U.S. stocks on Wednesday after the Federal Reserve held rates steady for a second-consecutive month. Wall Street took the news as a potential signal that the central bank could be near the end of its rate hike cycle, despite Fed Chair Jerome Powell remaining steadfast that the effort to tame inflation has “a long way to go.” To be sure, Willer cautions that Citi maintains a recession forecast for the U.S. in the second quarter of 2024, which complicates the picture for stocks in the first half of next year. “The call is tactical because Citi has a US recession call on the books for Q2 of 2024. If correct, this may make early next year a more difficult period for equities,” he said. Willer noted that investors are still cautious on risk assets, suggesting “the pain trade is likely for the equity market to move higher.”
