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Citi

Neutral on US Equities Despite Recent Sell-Off

  • The 1,175-point plunge last Monday – a 10% decline from its recent peak – wiped out gains for the year and pushed the Dow into correction territory.
  • The historically low market volatility experienced in recent months spiked as the Chicago Board Options Exchange Volatility Index (VIX) – commonly used to gauge investor fear – jumped by more than 100%. VIX is also at its highest level in the last five years, above the “flash crash” of August 2015.
  • While there is fear among investors, Citi analysts believe that this recent development is merely a market correction as fundamentals such as GDP and earnings-per-share (EPS) growth remain positive.

 

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  • Citi analysts are also reassured that the equity rally has been driven by EPS. As such, they believe that either a shock in USD, growth, market/liquidity or inflation is needed to break the equity bull market. Citi’s US equity EPS growth forecast for 2018 rose from 11% in December to current level of 14%. Citi believes that the biggest driver of this upgrade is the US corporation tax cut.
  • Citi analysts also expect the 14% EPS growth in 2018 to be supported by core business improvements (5%), a weaker US dollar (1%) and rising commodity prices (1%). Tax cuts make up the other 7%.
  • Citi remains neutral on US equities, despite the recent sell-off – but identifies emerging market equities, financials and materials as attractive opportunities for investors.

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