By Jules Rimmer
Citi sticks to its bullish view on U.S. equities
Investors have spent much of this year dumping the dollar, but strategists at Citigroup are now calling a temporary time-out on that greenback hating.
Having been bearish on the dollar DXY, a Citi team led by Dirk Willer made a tactical argument for switching to neutral in the short-term, in note to clients released Thursday.
After the dollar’s 11% fall in 2025, they find the euro’s strength against the U.S. currency (EURUSD) overdone, especially considering the rate differential whereby U.S. rates are some 250 basis points above the E.U.
Willer and his team looked at previous occasions when a move of similar dimensions has taken place, finding those have followed by “a period of EURUSD consolidation and marginal USD strength.” While they’re neutral on the dollar for now, the strategists expect to turn bearish again in September or sometime after, warning the September Federal Open Market Committee meeting could reignite such bets.
Recent data showing economic resilience has provided the dollar with support by pricing out Fed cuts, but capital flows and the U.S. balance of payments overhang suggest downside asymmetry later in the second half.
In one of the more prescient calls of the year so far, Citi’s asset allocation team upgraded U.S. equities SPX to overweight in early April, and are sticking to that as the second half of the year starts. As the title of their note “Still climbing a wall of worry” suggests, they continue to espouse the pro-risk cause and predict the continued resurgence of the AI theme will remain a prominent feature of the rally.
Willer and his team are overweight equities in general, preferring ex-China Asian emerging markets like Korea and Taiwan that are profiting from the AI theme as well as India, which they sense will strike a relatively benign trade deal with the U.S.
Citi also still predicts fiscal upside in Europe XX:SXXE with Germany driving the trend, but the spillover effects are positive for the rest of Europe with fewer risks of vigilantism in the bond market. Citi is funding the overweight in Europe with an underweight recommendation in the technology-light U.K. stock market.
The Citi global asset allocation team is sticking with its underweight duration call, (avoiding bonds of longer maturities) owing to the threat of rising inflation from both cyclical and tariff-related factors, and outsize fiscal deficits. The expected glut of global bond issuance to fund those deficits, especially in U.S. Treasurys BX:TMUBMUSD10Y and Japanese government bonds BX:TMBMKJP-10Y, also reinforces the bearish stance.
The strategists were careful to warn, however, that if the Fed starts to cut – they believe a September easing is a 50:50 bet – the underweight duration call will be reversed quickly.
-Jules Rimmer
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07-18-25 0621ET
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