On Friday, Citi expressed confidence in large-cap stocks, suggesting that their recent strong earnings performance indicates the market's rally may not be as overextended as some fear. Citi's analysis, which examined S&P 500 constituents over the last 30 years, focused on instances where stocks had rallied by 35% or more in the preceding three months. Using this criterion, they found that stocks like NVIDIA Corporation (NASDAQ:NVDA), which had risen by 39% in that timeframe, didn't necessarily face a downturn after such a run-up.
The study narrowed down over 100,000 company earnings quarters to just 200 by filtering for large companies with a market capitalization more than five times the median at the time. The findings revealed a slight median pullback of 2.4% in the four days following earnings announcements, with an average event day performance dip of 0.75%. However, over the subsequent three months, returns were marginally positive, challenging the consensus that shares are typically poised for a disappointment after an extreme rally.
Citi's position is that strong earnings among these large-cap stocks are indicative of a solid market rather than a bubble about to burst. As a result, the firm maintains an overweight stance on U.S. equities, including the tech-heavy markets of the Taiwan Stock Exchange (TWSE) and Korea Exchange (KOSPI), as well as the technology sector in the United States. Citi believes that in the early stages of new technology, companies providing the tools and services (shovel sellers) stand to benefit more than those directly involved in the innovations (gold miners). This perspective underpins their continued overweight recommendation for the tech sector within their asset allocation product.
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