Investing.com -- Citi analysts provided a nuanced perspective on the US stock market in a note Friday, even as valuations reach elevated levels.
With the S&P 500 hitting new highs and traditional metrics signaling potential valuation pressure, Citi advises against "rushing to sell US equities."
The report highlights that the Federal Reserve’s recent 50 basis point rate cut has "reignited animal spirits," propelling the S&P 500 to surpass mid-July levels.
While traditional valuation metrics suggest increased pressure, Citi's analysis using a "macro-driven fair value model and reverse DCF framework" presents a more neutral outlook.
The bank says this suggests that while index gains might become more challenging due to full valuations, an aggressive sell-off is not warranted.
Citi notes that the recent S&P 500 record is not solely driven by growth stocks; value stocks have also played a significant role. However, the report anticipates a shift from decisive style leadership to a broader market re-rating supported by the Fed’s pivot and narrowing earnings growth differentials.
The bank says valuation concerns are evident, with the trailing P/E ratio surpassing 23x and reaching a new year-to-date high.
Despite this, they note that forward P/E ratios are lower than in July, indicating that estimates are trending upwards. Citi’s macro-driven models suggest a fair P/E range of 19.8-24.7x, driven by declining front-end yields and CPI.
Under these conditions, Citi emphasizes that the S&P 500's new highs and full valuations should not prompt an immediate sell-off.
Instead, they say investors should focus on "more nuanced opportunities" within the index. They state that specific areas of interest include Mid Cap Growth, Quality improvements, certain Tech and Green themes, and sector-specific opportunities in Consumer Discretionary, Financials, and Real Estate.