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Citi says S&P 500 not in a bubble, tells investors to 'buy pullbacks'

Published 02/27/2024, 05:07 AM
Updated 02/27/2024, 05:10 AM
© Reuters.  Citi says S&P 500 not in a bubble, tells investors to 'buy pullbacks'

The latest market upswing, sparked by Nvidia’s (NVDA) strong earnings beat and guidance, has brought S&P 500 valuations to the forefront, making them a primary concern among investors as the index reached new all-time highs.

Weighing in on this matter, Citi strategists said they maintain a basic view that valuations hold significance primarily when considered alongside expectations for underlying growth, and on their own, are less indicative of future performance than is widely believed.

Overall, the year-to-date surge of nearly 7% in the S&P 500 increases the necessity for fundamental growth factors to materialize and sustain the market's movement, Citi added. Essentially, investors are advancing funds based on anticipated future earnings growth.

“We remain confident in this, but need to recognize that much has quickly been priced in. While the index may overshoot our year-end 5100 target in the short term, it seems premature to increase the probability of our 5700 bull case scenario,” the strategists said.

“That scenario reflects a goldilocks macro and 22x a $260 index earnings projection (vs our base case $245 estimate). For now, we remain constructive on SP 500 fundamentals, but prefer to buy pullbacks,” they added.

Citi also responded to recent parallels drawn between the current bull market and the tech bubble, pointing out that today's valuation multiples are significantly lower than those seen in 1999-2000.

From their perspective, the strategists think that the underlying fundamentals of the market have markedly changed, distinguishing the current situation from that of the late '90s.

“That said, the current spending ramp on gen AI infrastructure and product will need to translate to incremental revenue and growth drivers. But it is premature to judge that,” the strategists commented.

Moreover, Citi previously said that market broadening is crucial for reaching new index peaks. While it's true that a handful of mega-cap companies have significantly propelled the S&P 500 to new highs, contributing to about half of the index's gains, there's also been a significant rise in the number of stocks reaching 52-week highs, Citi highlighted.

“PEG ratios support a broadening thesis. However, we’re still left with a valuation near the high end of longer-term averages. So, we expect a tougher path to index upside from here, but with an ongoing stock selection/dispersion focus,” it wrote.

Finally, the strategists stated the S&P 500 has entered a new bull market as many U.S. corporations have come out of the pandemic with a sharpened focus on their businesses, robust cash flow, and a commitment to enhancing productivity.

On top of all that, the tech sector is experiencing a transformative wave, thanks to the burgeoning revolution led by generative AI.

Latest comments

Citi shares fall from $65 to $55 a fallback
hahahaha pumped sold and they left yourl with the bags
Tell me you bought the top without telling me you bought the top lol
They were wrong last year about SPY reaching 500
in other words, stocks have entered a permanently high plateau. where did we hear that before?
hey bears big chance is coming! all in short sell and keep the market pumps! GO~
If they say no bubble and buy pullbacks you know big corretion is coming
yep they're selling everything and they need dumb buyers
Have they looked at the Schiller P/E or ANY other valuation metric?
clearly not - nor the yield curve on the verge of un inverting, but hey, they're hoping to fool enough people enough of the time so someone else can hold the bags
If everyone is saying you arent in a bubble every day you are in a bubble for sure.
Absolutely correct.
Don't they think that earnings might be at their peak levels now given slowing economy ahead of us? Economic expansion is slowing because of higher ir environment. If history is wrong, it will be for the first time.
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