Citi Cautions Against ‘Hurriedly Selling US Equities’ Despite High Valuations

Citi analysts have shared a thoughtful analysis of the US stock market, pointing out that despite rising valuations, there is no need for immediate action. The S&P 500 has reached new heights, and while conventional metrics indicate potential valuation pressures, Citi suggests that investors should not be quick to sell their US equities.

The recent 50 basis point rate cut by the Federal Reserve has reportedly “reignited animal spirits,” helping the S&P 500 to exceed levels from mid-July. Although traditional valuation indicators point to increased pressure, Citi’s use of a “macro-driven fair value model and reverse DCF framework” offers a more balanced perspective.

According to the report, while gains in the index may become more challenging due to full valuations, a drastic sell-off is not justified. Furthermore, the surge in the S&P 500 has not been exclusively fueled by growth stocks; value stocks have also significantly contributed. Citi anticipates a transition from distinct leadership styles to a more generalized market re-rating, bolstered by the Fed’s strategic shift and narrowing earnings growth differentials.

Valuation concerns are apparent, particularly as the trailing P/E ratio has exceeded 23x, reaching a new year-to-date peak. However, forward P/E ratios are currently lower than they were in July, indicating that earnings estimates are on the rise. Citi’s macro-driven models suggest a fair P/E range of 19.8-24.7x, influenced by declining front-end yields and CPI.

In light of these findings, Citi advises that the S&P 500’s recent peaks and full valuations should not trigger an immediate sell-off. Instead, investors are encouraged to explore “more nuanced opportunities” within the index. The firm highlights specific areas of interest, including Mid Cap Growth, quality enhancements, select technology and green initiatives, as well as sector-specific promising prospects in Consumer Discretionary, Financials, and Real Estate.