Citi Cuts US Stocks to Neutral, Favors Europe After AI Selloff

“We worry that positioning on key indices, such as the Nasdaq, could reset lower into net-short territory.”

That is a warning about a possible shift toward bets on declines, without a forecast for a specific index loss. Citi also said selling had spread across regions and sectors, so the risk extended beyond technology.

Europe’s appeal is relative, and has changed before

Citi raised Europe excluding the UK to overweight because of its lower exposure to technology volatility and greater sensitivity to falling oil prices. It also upgraded global healthcare and European food and beverage to overweight. Its global sector recommendations now combine economically sensitive businesses with defensive stocks; materials remains overweight.

In a Citi podcast recorded February 2 and published February 3, Manthey said the team had downgraded Europe to neutral for the first time in more than a year. Geopolitical risks and euro-dollar volatility had raised the hurdles for European earnings, particularly in internationally exposed sectors. Citi still forecast gains for the region then, but upgraded Japan to overweight alongside its existing preference for emerging markets.

That earlier call matters to the latest upgrade: Europe’s relative appeal depends on the earnings and market backdrop, rather than its smaller technology exposure alone.

A separate analysis by Goldman Sachs, the investment bank, quantifies the concentration difference. Its strategists estimated that AI infrastructure stocks represent about 15% of the Stoxx 600, against roughly 40% of the S&P 500. In the report’s account of Goldman’s note, those stocks contribute less than a quarter of the European benchmark’s forecast 9% earnings growth for 2027, compared with more than two-thirds of projected earnings growth for the US benchmark.

These are Goldman’s exposure estimates and earnings forecasts, not realized growth. The report does not detail its classification of AI infrastructure stocks. Goldman also said Europe outperformed the US in each of the eight largest AI-led selloffs since 2023. That selected sample illustrates the diversification argument without establishing protection against every market decline.

Goldman Sachs estimated AI infrastructure stocks at about 15% of the Stoxx 600 and roughly 40% of the S&P 500. Its classification is not detailed in the report. Source: Bloomberg via Yahoo Finance.

What would justify renewed US and technology exposure?

Citi remains positive about AI, but wants cleaner positioning, more stable sentiment and earnings revisions that give the trade a firmer foundation. Its market targets for 2027 remain positive, supported by expectations for lower interest rates, resilient economic data and potentially easing geopolitical risks.

The tension between AI spending and returns predates this selloff. In the February podcast, David Groman, Citi’s senior global equity strategist, said the team’s outlook had identified a potential source of volatility: AI revenues might not grow as quickly as the capital spending required. Yet he also said the team had not seen a broad deterioration in technology fundamentals at that point, and distinguished hardware businesses involved in the buildout from software companies whose existing business models might face AI risks.

Those February observations do not establish November earnings conditions. They explain why spending concerns alone cannot settle the allocation question. The next test is whether earnings revisions and steadier positioning support renewed exposure. The reports give no numerical threshold or timetable for Citi to restore an overweight recommendation.

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