Citi downgrades tech stocks as its flagship indicator signals ‘euphoria’ levels

As the second quarter approaches, Citigroup equity strategists anticipate a shift in the US equity rally, predicting it will extend to more defensive market segments, especially those influenced by interest rates. 

The S&P 500 has overshot our 5100 year-end target reflecting soft landing and AI enthusiasm,” Citi strategists said in a note.

“… [Y]td price action has run valuations higher, implying a burden on fundamental growth follow through.”

Citi’s analysis suggests a modest overweight in growth sectors, despite downgrading the technology sector to market-weight due to mixed prospects within its subsectors. Specifically, the software segment, which includes giants like Microsoft (NASDAQ:MSFT), is retained at Overweight.

However, semiconductors, represented by companies like Nvidia (NASDAQ:NVDA), are kept at Market Weight. Finally, hardware, with Apple (NASDAQ:AAPL) as an example, is downgraded to Underweight, affecting the overall technology sector’s positioning.

Elsewhere, the consumer discretionary sector is elevated to Overweight, buoyed by upgrades in the auto sector. Retailers like Amazon (NASDAQ:AMZN) and the durables/apparel segment continue to be strong, reinforcing the sector’s bullish outlook. 

Conversely, financials are adjusted to Market Weight with a balanced view: banks retain an Overweight rating, but insurance, despite performing well in a hawkish Federal Reserve cycle, is downgraded to Underweight.

The strategists have also warned about the sustainability of the current market rally. 

“The Levkovich Index has just hit a “euphoria” reading,” strategists added.

The Levkovich Index is Citi’s sentiment gauge that follows everything from margin debt to short interest to the put-to-call ratio.