Citigroup Inc. downgraded its view on U.S. equities while upgrading China to overweight, another sign of the growing divergence in the outlook toward the world’s top two markets.
“U.S. exceptionalism is at least pausing” for the coming few months, Citi’s strategists including Dirk Willer, its global head of macro research and asset allocation, wrote in a note dated March 10, lowering their call on the nation’s stocks to neutral from overweight. A team at HSBC Holdings Plc also cut U.S. equities to neutral on Monday, saying it sees “better opportunities elsewhere for now.”
“The news flow from the U.S. economy is likely to undershoot the rest of the world in coming months,” Willer and his team wrote. The neutral take on U.S. stocks is over a three- to six-month time frame, and more negative U.S. data prints are expected, they added.
Chinese shares look attractive even after their recent rally, the Citi strategists wrote, citing DeepSeek’s artificial-intelligence technology breakthrough, the government’s support for the tech sector and still-cheap valuations.
Citi’s actions came as Wall Street witnessed another sharp selloff on Monday amid growing concerns that President Donald Trump’s tariff hikes and spending cuts will hurt the U.S. economy, which has hitherto defied naysayers with its strength and kept stock investors bullish.
For two years in a row, equity-market forecasters raised their expectations for the S&P 500 Index repeatedly to keep up with an inexorable rally. But just under three months into the year, many sell-side strategists have begun to moderate their rosy forecasts for 2025. The S&P 500 Index has lost 4.5% so far this year after rallying more than 20% in each of the previous two years.
That’s quite a contrast with China, where equities have been on a tear this year. A gauge of Chinese stocks listed in Hong Kong has surged 20%, making it one of the world’s best-performing indexes in 2025. It is set to beat the SPX this quarter by the most September 2007.
While Citi had been overweight American stocks since October 2023, Willer and his team in November cautioned U.S. exceptionalism trades “may be at risk from an end to the Ukraine war” though “it is too early to position for that.” They also said it was too early to position for Chinese equities’ outperformance despite potential local stimulus.
The divergence between the U.S. and China is even more pronounced when it comes to technology stocks as the recent emergence of an artificial-intelligence model from Chinese startup DeepSeek proved to be a game-changer that has spurred a re-rating of the sector in the Asian nation.
A Societe Generale SA’s basket of China’s seven tech heavyweights including Alibaba Group Holding Ltd. has gained more than 40% this year compared to an about 10% drop in an index of the Magnificent Seven stocks, whose slump has also pushed the Nasdaq 100 Index to the brink of a correction.
Another factor accelerating the shift away from U.S. assets is the emergence of relatively cheaper alternatives in other parts of the world. For one, Germany’s plan to significantly raise spending is being hailed as a watershed moment in European policymaking, boding well for its assets. The European nation’s DAX Index has advanced almost 14% this year.
While downgrading U.S. stocks, HSBC strategists also upgraded European equities, excluding the UK, to overweight from underweight saying they expect euro-zone fiscal stimulus to be “a potential game-changer.”
