Here’s Why Citi Downgraded US Stocks on Monday

Citi became the latest investment firm to voice skepticism about the outlook for U.S. stocks on Monday as tariff uncertainty continues to weigh on sentiment. 

Citi analysts on Monday downgraded U.S. stocks to “neutral” from “overweight,” citing “still-high valuations and mounting downgrade pressures.” The analysts also upgraded Japanese and U.K. stocks to “overweight,” joining continental Europe in Citi’s group of preferred regions.

Tariffs, the analysts said, are likely to reduce both U.S. GDP and corporate earnings, undermining two of the core drivers of the “U.S. exceptionalism” of the past decade-plus. At the same time, Citi estimates U.S. stocks as a whole are historically expensive, “trading at c80th percentile valuation multiple vs. history” even after the recent sell-off. 

U.S. stocks have outperformed their global peers for most of the past 15 years. The post-Global Financial Crisis order of low interest rates and low inflation favored the fast-growing tech stocks that have come to dominate the U.S. stock market. As a result of Wall Street’s outperformance, international investors have bought far more U.S. stocks than the other way around. Citi warns that, against this backdrop, “small shifts in allocation decisions can have an outsized impact.”

As U.S. stocks have lost their sheen, international equities have taken on a fresh luster. European and Japanese equities, Citi says, trade at attractive valuations. Japanese equities appear to be pricing in a more substantial earnings contraction than other markets, but “Japan seems as likely as any market to see reprieve from US tariffs,” the analysts note.

Citi also forecasts that the U.S. market is made even less attractive relative to Europe and Japan by the White House’s unpredictability. “While tariff risks have abated, macro/policy uncertainty remains elevated. … Investors have also shown signs of shunning other US assets, with the dollar weakening and US Treasury yields rising,” the analysts wrote. “Therefore, we believe investors could continue allocating away from US equities as well.”