Investing.com -- Citi strategists maintained an Overweight rating on US stocks despite potential risks stemming from the upcoming presidential election.
The bank notes that the US economic data has been positive heading into the election, highlighting a generally upbeat post-payrolls environment, with data frequently exceeding forecasts.
However, Citi cautions that election-related uncertainties are growing more pronounced. Current market sentiment—and Citi’s recent polling—suggest a lean toward a Trump victory, with certain US dollar buying and bond market selloffs reflecting this possibility. Nonetheless, the election remains close.
Citi strategists led by Dirk Willer said that “this month, we de-risk trades which have too much binary outcome risk but keep those that have a macro justification or an asymmetry to a Trump victory.”
“This means we take profit on our European equity underweight vs the US,” they added.
Citi staying overweight on US stocks comes as the Wall Street firm sees a favorable setup as the year-end approaches, while also keeping an overweight position in European-peripheral rates relative to the US, noting that a Republican win could elevate fiscal concerns.
The bank said its US equity team has modeled the potential policy impacts from each party, suggesting a Democratic (blue) sweep could present the most challenging environment for fundamentals—a scenario they view as unlikely given polling in key states.
Meanwhile, a Republican (red) sweep is expected to be only mildly negative over a two-year horizon, while a divided government would have minimal impact on fundamentals. Strategists also point out that equities could benefit from prospective tax cuts under a red-sweep scenario.
If Trump wins without full congressional control, he is expected to focus on tariffs and immigration policies, likely pushing inflation higher and slightly restraining growth.
Following the election, strategists see the S&P 500 facing potential headwinds, despite an initial year-end relief rally, as equities historically experience slight gains leading up to election day.
A Harris-led administration, assuming limited control in the Senate, would likely maintain the status quo.
“Rates would likely fall in relief, the curve would flatten, SPX should move higher, and the USD should weaken, maybe considerably,” strategists remarked.
They added that the new year, a potential new administration, and upcoming labor market data would provide them with an opportunity to reassess their overweight position as the seasonal tailwinds begin to diminish.