Citi’s Manthey Sees More Diversification Out of US Stocks

Core Viewpoint - Investors are expected to continue diversifying their equity holdings in 2026, leading to a projected 10% increase in a benchmark global stock index according to Citigroup Inc. strategists [1]. Group 1: Earnings and Market Confidence - A significant factor driving this trend is the convergence of earnings between the US and other global markets, with potential improvements in earnings per share in key markets outside the US due to government spending in Europe, reflation in Japan, and widespread adoption of artificial intelligence [2]. - There is a growing confidence among investors in international equities, with current positioning being more bullish on the rest of the world compared to the US, and a broader risk appetite compared to a year ago [3]. Group 2: Market Projections - The MSCI AC World Index is projected to end the year at 1,360 points, approximately 10% higher than the recent close, while the S&P 500 index is expected to gain 11% in 2026 [4]. - Despite all major equity markets trading above historical averages, US stocks are identified as the most expensive, trading at 22 times forward earnings, placing them in the 91st percentile over the past 25 years, while global equities are in the 90th percentile [5]. Group 3: Market Flows and Sector Preferences - Recent data indicates only a modest rotation in investment flows, with Europe experiencing its first year of inflows since 2018, which only reversed less than 10% of previous outflows. The long-term flow setup remains supportive of the diversification narrative [6]. - The investment strategy is overweight on emerging markets and Europe excluding the UK, neutral on the US and Japan, and underweight on the UK and Australia. Preferred sectors globally include technology, financials, and healthcare, while consumer sectors are underweight [7].