SKN | Citi Expects Equity Pullback as AI Investment Momentum Builds

Key Points

• Citi expects a potential U.S. equity pullback ahead of the November 3 midterm elections, while saying it would look to add risk if markets weaken. This is Citi’s market view, not a forecast adopted here.
• Citi continues to favor U.S. equities because it expects the AI investment cycle to remain supportive, despite higher oil prices, elevated rates and increased volatility in U.S. rates.
• The bank’s broader positioning remains selective: it is neutral on bond duration, underweight U.S. and European investment-grade credit, and continues to monitor energy prices and monetary-policy risks.

Citi Sees Resilience Despite a Difficult Macro Backdrop

Citi’s latest strategy points to continued resilience in U.S. equities despite several competing pressures, including higher energy prices, elevated interest rates and historically weaker September seasonality.

In its September 25 house views, Citi said it was impressed by the performance of equities given those conditions and the increase in U.S. rate volatility. The bank remains overweight equities, led by the United States.

The distinction is important for wealth investors: Citi’s position is not that macroeconomic risks have disappeared. Rather, its strategists argue that equity-market resilience and the continuing AI investment cycle are offsetting some of those pressures.

AI Remains Central to Citi’s U.S. Equity View

Citi continues to favor the United States because it expects the AI trade to continue.

The bank’s thesis is tied to the ongoing expansion of AI investment across technology infrastructure and related industries. Citi’s broader September 25 global outlook also described AI spending as a major engine of global growth, while noting that higher energy prices and tighter monetary policy remain important risks.

For investors, this creates a market environment in which AI-related earnings expectations remain an important source of equity support even as rates and energy costs introduce greater uncertainty.

Citi also identifies Emerging Asia as another potential area for additional risk exposure when conditions allow.

Midterm Volatility Is Part of Citi’s Timing Framework

Citi expects markets could weaken ahead of the November 3 U.S. midterm elections. The bank also points to historical market behavior following an initial Federal Reserve rate hike as another reason for expecting potential near-term “indigestion” in equities.

These are historical and strategic observations from Citi rather than a certainty about how markets will behave in 2026.

Citi’s own stated approach is to wait for a pullback before increasing exposure. Its September strategy note specifically says the bank would add risk if equities weaken.

For private wealth portfolios, that distinction matters. A market pullback can change entry valuations, but it does not by itself establish whether underlying corporate earnings expectations have improved or deteriorated.

Oil and Rates Remain the Main Macro Variables

Citi’s equity view is being formed against a backdrop of higher oil prices and elevated interest-rate volatility.

The bank believes the United States is relatively more insulated from additional oil-price increases than some other markets. At the same time, Citi remains cautious on fixed income, maintaining a neutral duration stance and an underweight position in U.S. and European investment-grade credit.

Citi also noted uncertainty over how far the Federal Reserve may continue tightening policy. That makes the interaction between energy prices, inflation expectations and Treasury yields particularly important for both equity and bond portfolios.

The Wealth-Management Implication

For HNWIs, Citi’s framework points to the importance of separating tactical market volatility from structural investment themes.

AI investment can continue supporting corporate earnings and capital expenditure even while higher rates pressure valuations. Conversely, a strong equity market does not eliminate the portfolio consequences of higher bond yields or geopolitical energy risks.

That makes liquidity, valuation discipline and asset-allocation flexibility increasingly relevant. Citi’s own positioning reflects this balance: equity exposure remains elevated in its framework, while credit and duration positioning remain more cautious.

Closing Insights

Citi’s September 25 strategy view combines confidence in the continuing AI investment cycle with recognition that higher oil prices, interest-rate volatility and the approaching U.S. midterm elections could produce periods of market weakness.

For global wealth portfolios, the important issue is not simply whether a pullback occurs. It is how the underlying drivers behave during any period of volatility. AI-related earnings and capital spending, Treasury yields, energy prices, Federal Reserve policy and credit spreads provide a more complete framework for assessing whether market weakness represents a change in fundamentals or primarily a change in risk pricing.

Citi’s recommendation to add risk during a pullback is its own investment view. The broader takeaway is that the AI cycle remains an important market driver while macroeconomic and geopolitical risks continue to shape the path of equity valuations.

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