Citi advises against ‘rush to sell US stocks’ despite high ratings by Investing.com

Investing.com — Citi analysts offered a nuanced outlook on the U.S. stock market in a note on Friday, even as valuations hit highs.

With new highs hit and traditional metrics signaling potential valuation pressure, Citi advises against a “rush to sell US stocks.”

The report notes that the Federal Reserve’s recent 50-basis-point rate cut has “rekindled animal spirits,” propelling the S&P 500 past mid-July levels.

While traditional valuation metrics suggest increased pressure, Citi’s analysis using a “macro-based fair value model and an inverse DCF framework” presents a more neutral outlook.

The bank says this suggests that while index gains could become more challenging due to full ratings, an aggressive sell-off is not warranted.

Citi notes that the S&P 500’s recent record isn’t just driven by growth stocks; value stocks also played a significant role. However, the report anticipates a shift from decisive stylistic leadership to a broader market reassessment, supported by the Fed’s pivot and narrowing earnings growth differentials.

The bank says valuation concerns are evident, with the trailing P/E ratio exceeding 23x and hitting a new year-to-date high.

Despite this, they note that forward P/E ratios are lower than in July, indicating that estimates are trending upward. Citi’s macro-based models suggest a fair P/E range of 19.8-24.7x, driven by declining initial yields and CPI.

Under these conditions, Citi emphasizes that the new highs and full valuations of the S&P 500 should not prompt an immediate sell.

Instead, they say investors should focus on “more nuanced opportunities” within the index. They state that certain areas of interest include mid-cap growth, quality improvement, certain technology and environmental themes, and sector-specific opportunities in the consumer discretionary, financial and real estate sectors.