Citi's strategy team says global equity markets could see a near-term consolidation phase after recent turbulence that combined sharp single-stock moves, quick shifts between factors and an uptick in worries tied to artificial intelligence-related exposure.
On the surface, European equities finished the stretch marginally higher, but strategists pointed to pronounced dispersion beneath headline index moves. In particular, they noted a roughly 20 percentage point gap between the best- and worst-performing industries within the MSCI Europe index, underscoring how divergent performance has been across sectors.
Examining the corporate reporting season, the strategists led by David Groman described results as 'average' in aggregate. Roughly 56% of STOXX 600 companies topped consensus forecasts, a share the note described as broadly consistent with historical norms. On aggregate, earnings have come in about 4% ahead of expectations.
What has been more unusual than the headline beat rate, Citi said, is the market's reaction to results. Stocks that missed forecasts have been punished more severely than is typical, while some names that reported beats have failed to rally and, in some cases, have underperformed following results. The strategists suggested this pattern likely reflects a strained valuation backdrop - European equities, they argued, are already pricing in an EPS upgrade to year-end.
Broader market dynamics have amplified volatility. Citi highlighted a sharp selloff in software and other sectors deemed 'AI-disrupted,' which has driven a significant repricing of global information technology. In relative terms, the bank now regards global IT as the cheapest sector among global sectors while noting that it is still projected to deliver about 40% EPS growth in 2026.
That repricing of growth-oriented names has coincided with a rotation toward more traditional Value sectors. Energy and Basic Resources have led the year-to-date performance for Value, according to Citi. The strategists also observed that Value leadership had already been visible in markets such as Europe and Japan, and they suggested that the recent U.S. outperformance may be more of a catch-up dynamic.
Looking at historical episodes when dispersion markedly outpaced index volatility, Citi's analysis indicates that equities tended to be flat on average over the following one- to three-month period, though returns were typically higher six months later. Based on that pattern, the team said, 'On a tactical basis, global equities could thus see some consolidation.'
Despite the possibility of persistent volatility through the year, Citi said it remains constructive on equities into year-end and expects market performance to broaden. The bank maintains an Overweight stance on Emerging Markets and Japan, sees global IT as increasingly attractive within its allocation models, and retains a Neutral view on the sector in Europe.
Bottom line: Citi warns that recent dispersion and sector-specific repricings could produce a short-term consolidation in equities, even as it stays constructive on a medium-term horizon and favors Emerging Markets and Japan while monitoring the evolving attractiveness of global IT.