(Reuters) -Citigroup on Monday downgraded U.S. stocks in anticipation of a pullback in growth stocks and a recession in the fourth quarter of the year, while betting on beaten-down counterparts in Europe with an upgrade.
The brokerage cut its rating on U.S. stocks to "neutral" from "overweight", following a strong rally in the first half of the year. It warned that growth stocks were set for a pullback as the "euphoria" around artificial intelligence enters a more "digestive" phase.
Citigroup (NYSE:C) instead sees potential in "heavily discounted" European stocks, as the bank increased allocation to some cyclicals. These include the materials sector, which is seen benefiting from a potential uptick in China's economic growth.
The S&P 500 has gained 14.6% so far this year, while the tech-heavy Nasdaq jumped about 31%, driven mainly by a handful of tech stocks that rode high on AI potential.
Futures tracking the S&P 500 were flat by 8:00 a.m. ET.
Citigroup also downgraded the global IT sector to "neutral".
Strategists at the brokerage downgraded UK stocks on a lack of exposure to growth stocks and a stronger pound. Emerging market (EM) stocks, upgraded to an "overweight" rating, replaced the UK stocks in Citigroup's asset allocation.
"EM offers a more interesting risk/reward profile, with exposure to a combination of growth and materials. It could also benefit from USD weakness, rate cuts and potential improvement in China sentiment," the strategists said.