Citi’s Willer expects AI trade to outweigh Middle East risks

Investing.com -- Citi’s Global Head of Macro (BCBA:BMAm) and Asset Allocation maintains a constructive stance on equities despite ongoing geopolitical tensions in the Middle East, highlighting a renewed focus on the AI trade as a key driver of market sentiment.

“We remain overweight equities, including the U.S., as we see a continued return of the AI trade,” Dirk Willer said in Citi’s June Global Asset Allocation report.

The note argues that recent geopolitical events, including those in the Middle East, have not materially derailed risk appetite.

“We expect any impact from the Middle East tension on risky assets to be relatively short lived,” Willer wrote, adding that if oil were to spike again, it would likely be brief due to sufficient spare capacity.

Willer suggests such a move could even present an opportunity: “If risky assets were to be impacted by another oil spike, we would be ready to increase our equity exposure further.”

Citi retains a +1 Overweight position in equities and continues to favor U.S. stocks, citing strong AI momentum and supportive earnings.

The bank’s U.S. equity strategist recently raised the S&P 500 year-end target to 6,300, with a bull case of 7,000, underpinned by a “fading tariff fears”, which lead to lower growth concerns.

Within equities, Citi reduced its Overweight in Europe slightly to make room for an added Overweight in emerging Asia, particularly Korea, Taiwan, and India, which are seen as beneficiaries of the AI revival.

However, Willer acknowledges that U.S. tech outperformance poses a headwind to European equity gains. “Tech outperforming in the U.S. makes it less likely that Europe outperforms the U.S.,” the report said.

“Our strategists suggest that Europe only outperforms 30% of the time when the tech sector is outperforming in the U.S.,” it added.

Sector-wise, Citi remains Overweight technology, Communication Services, Banks, and Utilities, while underweighting Real Estate, Consumer Discretionary, Industrials, and Materials.

The Wall Street firm also flagged valuation concerns in U.S. equities but believes the recent correction has “reset the clock,” reducing the near-term risk of a peak in the rally.

Elsewhere, the U.K. remains Citi’s underweight call.