Citi: Cutting equity and base metals risk, awaiting clarity on Iran and AI financing concerns

Why cut equities to neutral, and why prepare to buy the dip?

Citi recently cut equity risk, primarily because its POLLS tactical indicator was triggered. Historically, after the indicator rose to 18 or above, equities fell by an average of about 3%–4% over the following month before recovering. The signal mainly covers a period of about one month and cannot determine how far a stock market bubble has progressed.
Citi is also concerned about an escalation in the Iran situation after the US midterm elections and persistent AI financing pressures. If the Iran situation becomes clearer or AI financing concerns fade, the bank favors buying the dip, as it sees year-end seasonality as favorable and believes the AI rally may not be over.
Slowing earnings growth is another constraint: consensus forecasts expect US earnings per share growth to fall from 35% in 2026 to 16% in 2027. But earnings forecasts made at the start of 2026 were revised upward over time, and Citi believes similar revisions could also lessen the scale of next year's slowdown.

Newer cloud providers have weaker balance sheets and higher financing costs; long-term agreements to sell computing capacity signed to build that capacity may also be priced far below spot prices, further squeezing investment returns.
If concerns about returns slow venture capital investment, funding pressure could spread from cloud providers to private AI companies that rely on external financing. Citi continues to believe that the shortage of computing capacity is real and that financially stronger companies can fund the buildout.
Citi remains underweight US and European investment-grade credit: equities can share in the upside of winners from AI investment, while creditors have limited upside but bear the risks of rising leverage, deteriorating credit quality and increased bond supply.
High-yield bond pressures remain relatively concentrated for now, however. Excluding bonds priced below 60% of face value, spreads on non-AI-related bonds have widened by only 6 basis points this year; Citi believes the current widening in CCC-rated bond spreads may overstate overall systemic risk.

Citi maintains a neutral overall duration, has added an overweight in UK government bonds, and has reduced but retained its overweight in emerging-market local-currency bonds. It is underweight French and peripheral European government bonds as relative positions and has moved German government bonds to neutral.
The UK budget brought no major surprises, and markets have priced in about 110 basis points of UK rate hikes by 2027. Citi believes that, if the Iran situation eases, actual hikes are more likely to be smaller than markets have priced in.
French fiscal consolidation lacks momentum ahead of the 2027 election, and its fiscal pressures could also affect broader European government bond spreads. German government bonds were moved back to neutral as their safe-haven characteristics prevailed and their correlation with energy prices declined.
Emerging-market bonds are supported by higher coupon income and the large weights of China and South Korea in the index; the latest inflation readings for most index constituents were in line with or below expectations. However, Citi reduced some emerging-market rates risk to add the UK government bond position.

Citi reduced its longstanding overweight in base metals to neutral. Global growth and economic data momentum remain favorable for metals, but a further escalation of the Middle East conflict or a weakening AI rally could hurt growth; Citi's commodities team has also shifted to a more neutral view on copper and aluminum.
Energy remains neutral: Citi expects oil prices eventually to fall, but further escalation in the conflict could still push prices higher in the near term. The bank estimates that roughly 10–15 dollars per barrel of the oil price reflects concern about an escalation in the conflict after the midterm elections; oil prices could still surge if regional energy facilities are struck heavily.
Middle East oil exports have recovered to near pre-conflict levels, but increased ship-to-ship transfers in the Gulf of Oman are tying up tankers and pushing up freight rates. Spot supplies remain tight and inventories are falling.