He mentioned that chip pricing significantly affects the efficiency of capital expenditure. “Chip pricing has had a greater impact on capex and the amount they can accomplish with every dollar of capex they’re utilizing,” he stated.
In the long run, energy needs from data centers might pose a challenge if prices continue to be high for a prolonged duration.
He noted that equities are improving as geopolitical pressures decline, influenced by adjustments rather than fundamental factors, with growth stocks anticipated to excel due to structural influences.
For the complete interview, check out the accompanying video
Citi has set a year-end target of 7,700 for the S&P 500, indicating further potential growth, although short-term market positioning may be sensitive to geopolitical issues and earnings patterns.
These are edited excerpts from the interview.Q: Are you optimistic about the US market? Your S&P target for year-end is 7700, suggesting a 10% gain from current levels. But do you feel that investors might be jumping the gun in the short term? There seems to be some complacency following the rebound in April, as the blockade remains, and currently, it’s just a truce. The conflict hasn’t truly resolved, with neither side addressing the underlying issues.A: I believe markets are moving past what may have been the worst of the news regarding the conflict in Iran. This is clearly a significant repositioning move. It seems to be a robust rally, particularly in beta stocks, but I think the NASDAQ’s outperformance, especially in the growth sector, is justified. This is a strategy for macro defense in equity markets, linked to secular trends rather than the cyclical economy.
Q: Software stocks have faced severe losses recently, haven’t they? There was a notable spike earlier this week, on Monday, when US software stocks moved up as a group. What’s happening with that sector, and how is the sentiment around those companies?A: They are bouncing back from very low levels. The sentiment is quite negative. Additionally, the long-term fundamental outlook remains challenging. We are currently underweight in software. While we generally favor technology, we prefer semiconductors to software. In the software sector, even high-quality names with good margins and ROEs are encountering difficulties as they come off peak performance.
Also Read | US market outlook stable; India to gain from supply chain shift: Oppenheimer Asset Management
To reiterate my initial point, as we return to fundamental discussions and move past broader macro concerns, focusing on semiconductors and AI infrastructure makes more sense than investing in software moving forward.
Q: Regarding global equity market positions, I understand you favor developed markets, with the US and UK still prominent choices, while some emerging markets have become more neutral, like India. Can you elaborate on your preferences between developed and emerging markets, specifically regarding India and the criteria for an overweight position?A: I must commend our global colleagues; we collaborate closely with them. Recently, we just increased our weighting in the US market again. However, I don’t see this as a long-term stance for us. We have been fundamentally bullish, but we maintained a neutral tactical position for some time, which we have just upgraded. This represents a defensive approach amid prevailing geopolitical uncertainties.
As for emerging markets, we slightly reduced our exposure. Generally, in EM, the AI trend is evident. We have more confidence in the US market compared to EM, and within EM, we are still evaluating conditions. Tactically, we believe Latin America is somewhat more shielded than Asia from price increases, especially with regards to the impacts of high oil prices, even though they have declined from peak levels.
Concerning India—this position remains neutral for us. Earnings downgrades have been ongoing, and more are anticipated; however, in relative terms, it is not as cyclical or concerning as other areas of Asia.
Q: Do you believe the increase in oil prices poses a threat to the AI-driven growth? This is critical as Asian markets are influenced by it, particularly because data centers consume vast amounts of energy. Do you think the extensive AI capital expenditures—backed by the $650 billion planned by the top four US tech companies this year—will stay on course, or is there a risk of disruption?A: In the short term, the focus regarding inflation and AI development concerns is more about memory pricing and compute resources, so the buildout will continue. The long-term challenge will be energy needs for data centers.
Also Read | Trump’s threats could disrupt global oil supply chains, warns Geosphere Capital’s Arvind Sanger
Indeed, if energy prices remain elevated for an extended duration, it can be an issue. However, in the near term, the narrative is still strong for secular growth as we continue to build out AI infrastructure; energy constraints do not hinder that now. The pricing of chips significantly affects capital expenditures and what can be achieved with each dollar of spending.
Q: Returning to previously successful trades from before the conflict, are we returning to that same framework?A: Yes, it indeed resembles discussions we had for 2025. Earnings growth will likely concentrate more on tech and growth narratives. Adjustments on the cyclical side, aside from energy—which, while having higher prices, also raises earnings expectations—might raise concerns about consumer upgrades in sectors outside the AI domain. It feels like we are revisiting the earnings themes from last year and approaching similar successful strategies.
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