Need to Know: Citi has just cut its rating on U.S. stocks to underweight. Here’s why and what it prefers.

Need to Know: Citi has just cut its rating on U.S. stocks to underweight. Here’s why and what it prefers.


While leading indicators seem to be suggesting both that the U.S. economy is headed for a downturn and that price pressures are cooling, the Federal Reserve seems determined to wait until prices fall further and the typically lagging U.S. jobs market cools off before relenting from its rate-hike campaign.

So keep that in mind as the nonfarm payrolls report gets released at 8:30 a.m. Eastern.

Onto our call of the day, which is from Citi, which has been one of the more hawkish of the Wall Street banks in terms of its Fed expectations. Its global strategy team looked around the world and decided to cut its recommendation on the U.S. to underweight from overweight.

“Recession reality approaches as Fed hawkishness manifests in signs of slowing activity. We expect a weaker first half, and a stronger second half,” says the Citi team. It has a midyear target on the S&P 500
SPX
of 3,700, but 4,000 for the year end. “We assume recession concerns and Fed hawkishness will peak during the first half of 2023, with markets anticipating recovery in the second half of 2023.”

Not that profitability will be so bad — it’s expecting just a 3% drop in earnings per share for the year, though that’s ahead of consensus expectation. And it’s expecting a leadership transition away from the past decade’s mega-cap growth names.

What Citi is now more optimistic about is Continental Europe, which it lifted to overweight from neutral. “Cheap valuations already discount much bad news. Economies should stabilize and rates peak later in the year,” says the Citi team, which already was overweight on U.K. equities.

Citi is neutral toward emerging markets (though overweight China and Brazil), and underweight Japan, which it says is vulnerable to an appreciation in the yen
USDJPY.

More broadly, says the Citi team, buy the dips but don’t chase the rallies.

The market

Coming off a 340-point slide in the Dow Jones Industrial Average
DJIA
on Thursday, U.S. stock futures
ES00
 
NQ00
weren’t moving much ahead of jobs data.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Economists polled by The Wall Street Journal expect the Labor Department to report nonfarm payrolls growth slowed to 200,000 from 263,000 but for the unemployment rate to stay at 3.7%. The range of sell-side forecasts goes from 130,000 to 350,000. Average hourly earnings are forecast to ease to 0.4%.

There’s also a host of Fed speakers, including Gov. Lisa Cook, who may offer their thoughts on the jobs report. Overseas, Eurostat reported that prices slowed to 9.2% year-over-year in December from 10.1% in November, the slowest rate since August.

Tesla
TSLA
may face further pressure after cutting prices in China for the second time in three months.

Bank of America
BAC
and JPMorgan Chase
JPM
were both downgraded to hold from buy at Deutsche Bank, which said new lows for bank stocks
BKX
seem likely.

World Wrestling Entertainment
WWE
shares rose on a Wall Street Journal report that former CEO Vince McMahon is planning a return and will pursue a sale of the business.

The House of Representatives may try again to install a speaker after Rep. Kevin McCarthy’s bid was rejected for the 11th time.

Best of the web

A look back at the wild 2022 for Bed Bath & Beyond
BBBY,
which warned it could file for bankruptcy.

Public schools have lost more than one million students since the pandemic began.

Damar Hamlin of the Buffalo Bills is on a good path to neurological recovery, but may face injuries to other organs.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

Ticker

Security name

TSLA Tesla

HKD AMTD Digital

MULN Mullen Automotive

GME GameStop

BBBY Bed Bath & Beyond

NIO Nio

AAPL Apple

AMC AMC Entertainment

AMZN Amazon.com

APE AMC Entertainment preferreds

Random reads

U.K. Prime Minister Rishi Sunak’s plan for compulsory math studies until the age of 18 has provoked an uproar, including this foul-mouthed rant from actor Simon Pegg. 

The New York Times asks if the Big Apple is turning into Los Angeles.

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