Citi: US stocks are in a non-cyclical state, investors should choose these types of stocks!
Citibank analysts put forward the "no cycle" theory, believing that the US stock market is facing a complex situation. Despite the shift in Federal Reserve policy, the key is whether corporate profit growth can be sustained. Analysts recommend that investors choose companies with actively growing return on equity driven by operations. The market finds it difficult to judge the economic cycle and needs to pay attention to upcoming corporate financial reports
At the beginning of this week, the surge in US bond yields almost hit all stocks except for NVIDIA (NVDA.O). Whether the market will erupt in strong concerns due to worries about soaring government deficits remains to be seen, but perhaps the release of a large number of corporate financial reports can divert attention from such concerns.
Since the outbreak of the COVID-19 pandemic, the market has been struggling to determine the specific position of the US economy in the business cycle, making it difficult to decide which type of stocks to choose. If the Fed's rate cuts indicate that the economy is about to slow down or even enter a recession, then high-quality stocks are usually the ideal choice; but if this is a signal of an imminent market confidence outbreak, then heavily hit small-cap and value stocks may be more meaningful.
Strategists at Citibank have put forward a new theory - the "non-cyclical" theory.
In contrast, the Citigroup team has pointed out a series of contradictions in economic data. For example, leading economic indicators from the World Federation of Large Enterprises continue to point to a recession that has not yet occurred, while at the same time, a survey of senior loan officers at the Fed shows that loan standards have peaked and are now tending to loosen. The US unemployment rate is low, employment numbers are healthy, but the number of full-time jobs is decreasing. There are many such situations.
Strategists led by Scott Chronert said, "After the outbreak of the pandemic, economic recession, supply chain disruptions leading to inflation, and the Fed's aggressive rate hikes, our economic system is currently normalizing. Although inflation is currently receding, price levels should still be higher than before the pandemic, putting pressure on wage growth and economic growth."
They added, "We believe that there are no two identical economic cycles, Fed cycles, or market cycles, and the current market operation has its unique dynamics at work."
So what does this mean for the stock market? The situation is complex - the institution remains bullish on US stocks, but strategists are concerned about corporate profits.
Citigroup analysts wrote, "Although the Fed is in the process of policy shift, the fundamentals are still affected by sustained high inflation, so the bigger question going forward may be whether corporate profit growth can continue beyond next year."
Citibank analysts prefer companies with a positive trend in return on equity driven by operations rather than buybacks. Analysts state that the performance of these companies has only a slight correlation with other factors (such as quality or value) and is almost unrelated to changes in economic conditions.