A turbulent start is brewing for stock markets, with technology set to drive a lower open after leaders of big artificial-intelligence companies said advances of AI should be slowed on safety concerns.
Fresh alarm by those AI leaders is one reason Citigroup has turned more cautious on U.S. stocks in our call of the day.
“We shift to neutral on U.S. equity risk,” a Citi team led by Stuart Kaiser, head of U.S. equity trading strategy, told clients in a note Sunday night. “A potential slowdown in AI model development could crimp EPS [earnings-per-share] revisions.”
Equity trading strategy tends to focus on short-term market mechanics, positioning and execution, as opposed to the bank’s more fundamental macro-led equity strategy.
He and his team also cite the following as reasons for that shift: November midterm elections — in which the Republicans could lose both the House of Representatives and the Senate — and sharply higher bond yields and surging oil prices that have emerged as cross-asset headwinds for stocks.
“The first of those risks is the key. If the trickle-down EPS story comes into question, it would weaken the key pillar of the equity rally,” they say.
Much of the S&P 500’s near 12% gain this year has been driven by increasing optimism from companies tied to the AI investment theme.
The strategists say they’d hedge against any weakening via put options on the QQQ — an exchange-traded fund that tracks the Nasdaq-100 —or the VanEck Semiconductor ETF. Such options give investors a right to sell those ETFs at a specific level by a specific date.
Kaiser and his team note that last week’s 0.8% drop for the S&P 500 — the biggest decline since the week ending Aug. 21 — was about stocks falling “victim to macro risks without the shelter of earnings.” Equities for now are facing a stretch with no earnings, a seasonally weak month of September and a summer pullback that has set a “higher bar to re-engage,” they say.
Their “road map” ahead is as follows: the S&P 500 stays stuck in a range of 2% higher and 2% lower from August highs, keeping “investors on the sidelines.” A drop of around 3% to 5% could draw in some dip buyers, but “markets would need to test all-time highs to trigger a chase,” they say.
Citi expects companies linked to power generation and data centers to be more affected by the flow of news surrounding the midterm elections than semiconductor and memory stocks. “That said, [AI] safety concerns could dampen enthusiasm, as was the case in early February.”
Citi strategists say markets can keep rallying on limited Federal Reserve interest-rate hikes — two or three — owing to strong EPS growth, solid labor markets and largely stable inflation even if above-target.