Here’s the pain trade Citi sees in U.S. stocks as S&P 500 exceeds its 2023 target


The artificial-intelligence craze hasn’t moved Citigroup’s year-end target for the S&P 500, but the bank’s equity analysts are keeping an eye out for what they’ve labeled the “p-AI-n trade.”

That would be the pain trade inflicted by AI enthusiasm or a potential pause or pivot in the Federal Reserve’s interest-rate hiking cycle, according to a Citi Research note dated June 2. Citi analysts, led by managing director Scott Chronert, currently have a year-end target of 4,000 for the S&P 500.

“A combination of artificial intelligence expectations and eventual end to Fed rate hikes have us looking over our shoulder for upside risk related to a flow shift and sentiment change in favor of equities,” the analysts said in the note. The S&P 500

closed Monday at 4,273.79, up 11.3% so far in 2023.

Still, Citi analysts are “fundamentally confident” in their year-end forecast for the S&P 500 along with an expected trading range around it of 3,800-4,200, according to the note. Megacap growth and technology stocks are driving the index’s gains this year, but recession worries remain, they said.

“The recent market action continues to tell us that, under the index surface, ongoing recession risk is being priced in,” the analysts wrote.

“How does one get the conviction to make a longer-term investment call related to generative AI impacts when expectations for an intermediate-term recession scenario remain front and center,” they said in the note. “This, of course, defines the current ‘p-AI-n’ trade.”

In their view, an S&P 500 target of 4,000 represents “fair value” based on an expectation for “a mild recession.” That price level aligns with a 18-19x multiple on earnings per share of $213 for the index, according to the note.

Meanwhile, the trading range that the Citi analysts expect to see around their year-end target is “now being tested to the upside.”  

“We are increasingly asked for any insight on quantifying artificial intelligence impacts,” the Citi analysts said. “That seems premature, meaning we’re left with anecdotal evidence.”

Chip maker Nvidia Corp.’s

recent guidance around AI “pulled forward many investors’ expectations for timing of the theme’s influences,” according to the Citi note.

“Our best guess as to how artificial intelligence and generative AI evolves from here is that it will gradually go from a unique, differentiated, and novel theme to another basic building block of our everyday lives and corporate processes,” the analysts wrote. “There is a subtle longer-term valuation tailwind likely to result from this.”

Read: AI buzz pushes tech stocks higher — but here’s why the ripple effect may be limited


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