Reflecting radical shift in the global economic landscape, Citigroup announced a comprehensive review of its global equity ratings, downgrading the US market from “a higher weight” to “neutral,” while upgrading both Japan and the UK to “a higher weight.” These changes come amid an uncertain economic outlook, earnings pressures, and changes in global trade policies.
US Rating Downgrade: Multiple Risks Ahead
According to a report issued by Citi analysts titled “The New World Order,” the decision to downgrade the US rating is due to a combination of factors, most notably high stock valuations, economic uncertainty, and ongoing earnings pressures facing companies. The report indicated that the US market continues to trade at historically high valuation levels, approaching the 80th percentile of historical averages, making it more vulnerable to volatility. Analysts add that the impact of tariffs, despite the apparent temporary respite following a 90-day interim trade agreement, still poses a real risk to US economic growth, and corporate profitability in particular. Even with this temporary pause in trade restrictions, Citi believes the US is vulnerable to a deeper economic slowdown if permanent and stable solutions are not reached.
Recession Indicators Pressure US Markets
Citi indicated in its report that its Earnings Revision Index reached a “recessionary” level of -40%, a very negative signal for the future of earnings for US companies. Citi also lowered its global earnings growth forecast from 10% to just 4%, given the current challenges. It is estimated that tariffs alone could shave around six percentage points off EPS growth for the MSCI World Index this year, reinforcing fears of a sharp decline in global market performance if these factors are not addressed.
Economic Pressures Reshape Investors’ Priorities
The US market is no longer the only destination attracting investors as it once was. In recent years, the United States has performed exceptionally well across various equity indices. However, the situation is now changing rapidly. Valuations have skyrocketed, while expectations of a significant economic slowdown have increased. At the same time, corporate profitability has declined due to the impact of recent trade policies.
On the other hand, temporary measures have not succeeded in stemming tensions between Washington and Beijing. Despite some understandings, tariffs still pose a direct threat to US growth. Therefore, many investors have become more cautious about dealing with US stocks. In addition, Citi reports indicated weak future earnings indicators. The Earnings Revision Index reached a negative level, reflecting the possibility of entering a recession.
US companies are striving to maintain their profits, but they face increasing challenges in global markets. As confidence in the continued US momentum dwindles, attention is turning to other, more stable markets. For example, Citi analysts see the Japanese market as offering better investment opportunities. Moreover, Japan enjoys more stable trade relations with the United States. In contrast, Japanese stocks trade at significantly lower valuations than their US counterparts. The UK has also demonstrated remarkable resilience to volatility, particularly given its defensive nature.
For this reason, investments are now being reallocated toward markets with lower risk and potential returns. It appears that the so-called “American exceptionalism” is no longer a guaranteed reality for the coming period. Many investors are beginning to rethink their strategies based on these realities. While the US continues to face pressure, alternative markets are emerging on the global scene.
Sector Strategy: Balancing Growth and Defensiveness
At the sector level, Citi follows a careful balancing strategy, prioritizing specific sectors based on their nature and position in the economic cycle.
The New Bet: Japan and the UK
In contrast, Citi sees attractive investment opportunities in both Japan and the United Kingdom, upgrading both countries’ stocks to “a higher weight.” This decision stems from a combination of factors, most notably lower market valuations and lower geopolitical and trade risks compared to the United States.
In Japan, for example, stocks are trading at a valuation multiple of just 15x over the past 25 years, making them attractive in terms of value, especially after they were already priced into negative earnings scenarios. Citi analysts also noted that Japan “is likely to successfully avoid US tariffs thanks to bilateral negotiations,” adding an additional element of security for investors in the Japanese market.
In the United Kingdom, attractive factors include significantly lower valuations and the defensive nature of the market, which makes it less vulnerable to sharp fluctuations in the global economy. Citi says this nature may enable the British market to withstand any future global financial or economic turmoil.
Continental Europe and Emerging Markets: Between Support and Conservatism
Despite its caution toward the US market, Citi maintained its “a higher weight” rating on continental European markets, driven by favorable fiscal stimulus and expectations of further interest rate cuts from the European Central Bank. Citi believes these supportive policies could create a favorable environment for a recovery in European stocks over the medium term.
On the other hand, emerging market equities were downgraded to “Underweight,” reflecting growing concerns about the exposure of these markets—particularly China—to the effects of high and persistent tariffs. Despite recent progress in trade talks between China and the US, trade tensions remain, potentially hampering economic performance in many of these markets.
Conditional Optimism on Trade Talks
Despite Citi’s cautious outlook on many markets, there is room for optimism conditional on improvements in trade talks between the US and China. Citi believes that tangible progress in this area could spark a significant market recovery and potentially shift global investment sentiment before the end of the year. According to its forecast, Citi’s target for the MSCI All-Country World Index is 1,050 points, indicating the potential for gains of up to 12% under favorable conditions, most notably a trade de-escalation.
