Citi's Strategic Pivot: From US Tech to European Equities
Policy uncertainties following the US midterm elections are reshaping global capital allocation. Strategists at Citi Group recently revised their asset allocation views, downgrading US equities and the global technology sector from 'overweight' to 'neutral'. Concurrently, they upgraded European stocks (excluding the UK) to 'overweight'. The core rationale behind this shift lies in the varying degrees of reliance different markets have on the artificial intelligence investment theme.
Market Turmoil Amid AI Regulation Fears
The Democratic Party's performance in the midterms heightened market expectations that a new Congress might strengthen oversight of the AI sector. This concern quickly translated into market action. The S&P 500 recorded its sharpest weekly decline since April 2025, while the tech-heavy Nasdaq 100 Index lost approximately $2.3 trillion in market capitalization in a single session. In contrast, Europe's Stoxx 600 Index managed a 0.2% gain over the same period.
The Relative Resilience of European Markets
The Citi strategy team, led by Beata Manthey, suggested Europe's relative stability during the sell-off was not accidental. They argue that European equity markets are far less dependent on AI-related trading flows compared to their US counterparts. As global investors move to reduce their exposure to AI, European markets, with their lower sensitivity to the theme, could potentially serve as a haven for capital.
Analysis from Goldman Sachs strategist Guillaume Jaisson provides supporting data: within the Stoxx 600, companies related to AI infrastructure account for roughly 15% of the index weight, yet they contribute less than a quarter to the index's projected 9% earnings growth for 2027. In stark contrast, AI-related stocks constitute about 40% of the S&P 500's weight but are expected to contribute over two-thirds of next year's anticipated earnings growth. This structural disparity explains why regulatory concerns have triggered a more severe reaction in US stocks, particularly in the tech sector.
A Cautious Outlook on the AI Trade
While maintaining a positive long-term view on artificial intelligence, the Citi team expressed caution toward AI-related assets in the near term. Manthey noted that these assets could face further downside pressure until market sentiment stabilizes and corporate earnings expectations provide a more solid fundamental foundation for AI investments. The report further warned that positioning in major indices like the Nasdaq could continue to decline, with the possibility of some investors even shifting to net short positions.
These adjustments signal that Wall Street is reassessing the risk-reward profile of the "AI narrative" within the current macro and policy landscape. Investor focus may be shifting from pure thematic speculation toward markets with stronger structural advantages and earnings certainty.