Citi Shifts US Stock Market to Neutral, Upgrades China – Here's the Reason

Citigroup Inc. has revised its stance on US equities, lowering them from overweight to neutral, while upgrading Chinese stocks to overweight. The shift comes as the investment bank sees a temporary halt in US exceptionalism, citing a changing economic landscape.

The bank had been bullish on American stocks since October 2023. However, according to Dirk Willer, Citi’s global head of macro research and asset allocation, recent trends indicate a slowdown in their ability to outperform.

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China’s Growing Appeal Amid AI Breakthroughs and Policy Support

On the other hand, Chinese equities are becoming increasingly attractive despite their recent rally. Willer points to advancements in artificial intelligence—particularly from DeepSeek—a startup that has made significant strides in the field. Additionally, the Chinese government’s continued support for the tech sector and favorable valuations contribute to the case for investing in China.

“In the coming months, economic developments in the US are likely to lag behind the rest of the world, making a resurgence of US exceptionalism unlikely—at least in the short term,” Willer wrote. The firm expects weaker US economic data in the next three to six months, reinforcing its neutral stance on American stocks.

US Market Jitters and Growing Concerns on Wall Street

Citi’s downgrade coincides with heightened market volatility and growing skepticism about the resilience of the US economy. Wall Street’s latest selloff reflects concerns that the decade-long trend of US market dominance may be wavering.

Investors are particularly wary of President Donald Trump’s tariff policies and spending cuts, both of which have fueled fears of an economic slowdown. Trump has also refused to rule out the possibility of a recession, adding further uncertainty to the market.

Global Market Shifts: Opportunities Beyond the US

Last November, Citi’s research team had warned that US exceptionalism trades “may be at risk from an end to the Ukraine war.” However, they believed it was too soon to reposition portfolios accordingly. Similarly, while they acknowledged the potential for Chinese equities to outperform, they advised patience in shifting investments toward China at the time.

Now, global investment patterns appear to be evolving. New opportunities are emerging outside the US, accelerating a reallocation of capital. China’s AI advancements, particularly DeepSeek’s breakthroughs, have raised questions about America’s continued dominance in the technology sector. Meanwhile, Germany’s decision to ramp up government spending is seen as a pivotal moment for European economic policy, creating fresh investment prospects.

Other Major Institutions Follow Citi’s Lead

Citi isn’t the only financial institution revising its outlook. HSBC Holdings Plc also downgraded US equities to neutral, stating that better investment opportunities exist elsewhere. HSBC upgraded European equities (excluding the UK) from underweight to overweight, highlighting anticipated fiscal stimulus in the eurozone as a “potential game-changer.”

Market Performance and Investor Sentiment

So far in 2025, the S&P 500 has dropped 4.5%, in contrast to a 20% surge in a benchmark index of Chinese stocks listed in Hong Kong, making it one of the top-performing indices globally. Germany’s DAX Index has also climbed by approximately 14%.

On Tuesday, Chinese equities demonstrated resilience, with a key Hong Kong-listed index remaining steady despite a 2.7% decline in the S&P 500 the previous day.

For the past two years, stock market analysts at firms such as JPMorgan Chase & Co. have continuously raised their expectations for the S&P 500 to keep up with its steady rally. However, just three months into 2025, many sell-side analysts are moderating their optimism. Trump’s new tariffs have amplified concerns about economic growth, contributing to increased uncertainty in US markets.

What’s Next for Investors?

Given these developments, investors are reassessing their portfolios. While the US remains an economic powerhouse, its stock market no longer appears to be the default choice for outperformance. Instead, analysts are increasingly looking at alternative regions, including China and Europe, for potential gains.

Citi’s move signals a broader shift in market sentiment, where economic and geopolitical factors are playing a greater role in investment decisions. As uncertainties surrounding US policies grow, global investors are watching closely to determine the next big opportunity in financial markets.