Citi Warns Stock Rally Chasers That Upside to 40% Jump Is Capped

(Bloomberg) -- Citigroup Inc. strategists poured cold water on bullish equity market sentiment, cautioning against chasing the rally in stocks amid virus risks and concern about earnings forecasts they view as excessively optimistic.

Global equity returns will be limited and stocks will still be near current levels 12 months from now, analysts led by Robert Buckland said in a note. The boost from $6 trillion of global quantitative easing will likely cancel out the economic drag from rising Covid-19 infections, they said.

“While we recognize that fighting the Fed is a thankless task, central banks have already driven a very significant rerating in global equities,” said the strategists. “We would not chase markets higher from current levels. We would prefer to wait for the next dip.”

Citi’s warning comes at a time when many market participants are wondering whether global stocks’ 40% rally from their 2020 lows has more upside, or whether it’s time to take profit and exit for safer instruments. While fiscal and monetary policies across the globe remain supportive, risks to the economic recovery continue to linger as some U.S. states like Texas are seeing a significant jump in Covid-19 infections.

Buckland’s team also cautioned that global equities are more expensive than investors may think. Based on their calculations, consensus earnings expectations for next year are 30% too high considering the global economic collapse, which brings the MSCI All Country World Index’s 2021 price-to-earnings ratio up to 24 times from the current 17 times.

“Policymakers have propped up markets by boosting the PE even as the E collapses. However, over time the E needs to catch up,” the analysts said.

JPMorgan Chase & Co. strategists led by Mislav Matejka echoed Citi’s sentiment, saying on Monday that the risk-reward for equities is unattractive in the second half of 2020, with stocks likely to lag behind bonds and cash.

Among different equity regions, Citi strategists are overweight U.S. and emerging markets, neutral the U.K. and Europe and underweight Japan and Australia.

©2020 Bloomberg L.P.