Citi downgrades US stocks but elevates China as ‘America First’ fades

Citigroup Inc (C) reduced its position on US shares while upgrading China to overweight, highlighting the widening gap in the outlook for the world’s top two economies. “US exceptionalism is at least pausing” for the coming few months, Citi’s strategists, including Dirk Willer, its global head of macro research and asset allocation, said in a note dated March 10, downgrading their position on the country’s stocks to neutral from overweight. On Monday, HSBC Holdings Plc (HSBC) similarly downgraded US stocks to neutral, citing “better opportunities elsewhere for now.” “The news flow from the US economy is likely to undershoot the rest of the world in the coming months,” Willer and his team said. 

They noted that the neutral outlook on US markets is for three to six months, with more negative US data prints predicted. Even after their recent rebound, Chinese equities appear appealing, according to Citi strategists, noting DeepSeek’s artificial-intelligence technological breakthrough, the government’s backing for the tech industry, and still-low valuations. Citi’s measures came as Wall Street saw another significant selloff on Monday amid mounting worries that President Donald Trump’s tariff increases and expenditure cuts may harm the US economy, which had previously confounded critics with its resilience and kept stock investors optimistic.

For the past two years, equity-market experts have consistently boosted their predictions for the S&P 500 Index (GSPC) to keep up with the unstoppable advance. However, just under three months into the year, many sell-side analysts have begun to modify their optimistic estimates for 2025. The S&P 500 Index has fallen 4.5% this year after rising more than 20% in the previous two years.

That contrasts with China, where stocks have been soaring this year. An indicator of Chinese companies registered in Hong Kong has risen by 20%, making it one of the world’s best-performing indices in 2025. It is expected to outperform the SPX this quarter, surpassing it by the highest since September 2007.

While Citi has been overweight American equities since October 2023, Willer and his colleagues warned in November that US exceptionalism trades “may be at risk from an end to the Ukraine war.” Still, it is “too early to position for that.” They also stated that it was too early to expect Chinese shares to prosper despite potential local stimulus. The divide between the United States and China is even more apparent regarding technology equities, as the recent release of an artificial intelligence model from the Chinese firm DeepSeek proved to be a game changer, prompting a re-rating of the sector in the Asian country.

Another factor driving the trend away from US assets is the availability of comparably less expensive alternatives in other regions. For starters, Germany’s intention to dramatically increase expenditure is heralded as a watershed moment in European governance, boded well for its assets. This year, the European nation’s DAX Index (^GDAXI) has increased by over 14%. While lowering US stocks, HSBC strategists boosted European shares, excluding the UK, to overweight from underweight, citing the eurozone’s fiscal stimulus as “a potential game-changer.”