SKN | Citi Maintains Caution on the AI Trade and Favors European Equities Over US Stocks

Key Takeaways:

• Citi expects the AI trade to remain under pressure, citing concerns over financing, oil prices and potential changes to data-centre development following the U.S. midterm elections.
• The bank anticipates a possible rotation away from technology stocks, with its proprietary “Generals” index approaching a cautionary signal.
• Citi has added some risk exposure outside the United States, preferring European equities because of their potential benefit from lower oil prices and a more accommodative European Central Bank.

Citi is maintaining a cautious position on U.S. technology equities following the midterm elections, warning that the forces weighing on the artificial-intelligence trade extend beyond political uncertainty. In a client note published November 6, the bank identified AI financing concerns and oil prices as more significant contributors to recent market weakness. Although Citi continues to expect data-centre construction to proceed, it believes changes in project locations, design and development schedules could create challenges for companies supplying the infrastructure.

Citi Identifies Financing Concerns Behind AI Market Weakness

Citi’s analysis distinguishes the usual midterm-election market pattern from the factors driving this year’s volatility. Historically, U.S. equities have tended to weaken ahead of midterm elections before recovering afterward. The bank’s seasonal analysis points to potential November-December S&P 500 returns of 3% to 4%. However, Citi cautioned that this year’s pre-election decline was not primarily election-driven.

Instead, the bank highlighted concerns about how large-scale AI infrastructure investment will be financed, alongside movements in oil prices. Citi’s research team continues to expect data centres to be built because demand for computing power remains strong. Nevertheless, political developments could influence where facilities are constructed, how they are designed and how quickly projects advance. For semiconductor companies and other infrastructure suppliers, these changes could complicate the growth outlook.

Technology Rotation Becomes a Central Portfolio Concern

Citi also pointed to its proprietary “Generals” index, which tracks how many of the seven largest S&P 500 companies trade below their respective 200-day moving averages. The indicator is approaching a cautionary threshold, reinforcing the bank’s expectation that investors may continue rotating away from technology shares.

This assessment suggests that strong long-term demand for AI computing does not necessarily translate into uninterrupted gains for every company associated with the theme. Financing requirements, infrastructure spending decisions and market positioning remain important considerations. Citi’s caution is therefore directed at the investment trade and its near-term market dynamics, rather than a rejection of the underlying demand for data centres.

Why Citi Is Turning Toward European Equities

Following the election, Citi added some risk exposure but chose to do so outside the United States. The bank expressed a preference for European equities, arguing that the region could benefit more directly from the substantial decline in oil prices. Lower energy costs may support European corporate conditions and could also create room for a more dovish European Central Bank policy stance.

On geopolitical risk, Citi noted that the U.S. midterm results had not clearly changed the trajectory of the conflict involving Iran. The bank did not consider renewed escalation imminent at the time of its assessment, while noting that a third U.S. aircraft carrier was not expected in the Gulf until mid-to-late November.

What Citi’s Position Means for Global Portfolio Allocation

Citi’s latest positioning reflects a preference for geographic diversification while uncertainty surrounding U.S. technology valuations and AI financing persists. Its European preference is based on relative macroeconomic and energy considerations, not a guarantee of superior performance. For globally diversified investors, the bank’s assessment highlights the importance of examining the financing behind AI expansion, the concentration of major technology stocks and the regional consequences of changing energy prices.

Going forward, Citi’s signals to monitor include the direction of oil prices, developments in data-centre investment, the behaviour of its Generals index and the ECB’s policy outlook. These factors will help determine whether the current technology-sector rotation develops further or whether market conditions improve.

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