Citi Research 5 December 2025 US Equity Strategy Size & Style Chartbook Scott T ChronertAC Managing Director scott.t.chronert@citi.com +1 415-951-1771 Drew Pettit Director drew.pettit@citi.com +1 415-951-1621 Patrick Galvin, CFA Vice President patrick.galvin@citi.com +1 212-816-5373 See AppendixA-1 for AnalystCertification, Important Disclosures and ResearchAnalystAffiliations Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covere ...

Market Trends & Investment Strategy - Goldman Sachs indicates that approximately 61% of New York City stocks are trading above their 200-day moving average, nearing a year-to-date high [1] - Aspire maintains a bullish outlook, favoring large-cap core and growth stocks due to consistent earnings growth [2] - The market has adapted to the significant weighting of large technology stocks within the S&P 500 [3][4] Earnings Growth & Sector Rotation - Technology sector is projected to achieve four consecutive quarters of double-digit earnings growth this year and the next [4] - Consensus expectations point towards a broadening of earnings growth into industrials, materials, and financials in 2026, with S&P global market intelligence data foreshadowing $300 earnings per share [6] - Excluding the second quarter, financials are also anticipated to potentially experience double-digit earnings growth next year [6] Economic Indicators & Consumer Sentiment - The July employment report showed unexpected weakness, potentially influenced by Independence Day tariff announcements, which caused the S&P to decline by 12% in four trading days [8][9] - The strength of the US labor market, characterized by strong labor demand and non-farm payroll growth, has been a key factor in the bullish outlook for over two years [10][11] - Consistent weakness in payrolls would necessitate a reassessment of current assumptions, given the labor market's role in driving consumer confidence and spending [10][11]

Market Analysis and Investment Strategy - Historically, value stocks outperformed growth stocks, and small-cap stocks outperformed large-cap stocks until the 2008 financial crisis [2] - The S&P 500 is no longer a broad-based market index, with the top 10 stocks accounting for 40% of the weight and the top 250 stocks accounting for 90% [4] - There are signs of euphoria in the market, with the cyclically adjusted price-to-earnings ratio higher than it has been 98% of the time, approaching tech bubble peak [4][5] - Younger investors are following momentum strategies, piling into what's working and driving it higher [6] - Despite concerns about overvaluation, the market can continue to rally even after warnings of irrational exuberance [7] Tariff Impact - Smaller companies generate most of their revenues within the United States but are still exposed to tariffs through reliance on foreign manufacturers [9] - Larger companies may be better equipped to handle tariffs by absorbing costs or passing them on through price adjustments [10] Stock Recommendation - Grant Wealth Management likes Verizon, a large-cap value stock that pays a generous dividend and has been increasing it every year for the past 18 years [11][12] - Verizon has 40 times the revenue of Palantir and sells for nine times earnings, while Palantir sells for 285 times earnings [14] - It makes sense to pay for growth, but there is a point where it no longer makes sense, making Verizon a more attractive option [13][14]

ETF Market Trends - Year-to-date net ETF inflows have topped $645 billion [1] - Active ETFs accounted for approximately 25% of flows in June, while passive ETFs accounted for 75%, indicating active ETFs are gaining ground [3] - Over the last 12 months, US equities have seen approximately five times the inflows of international equities, but in the last month, international equity has overtaken US equity [4] Investment Opportunities - Non-US investments have benefited from a tailwind due to the dollar, with a difference of around 10% between hedged and unhedged returns [7] - Small caps have not been favored in the US, but have performed well in non-US developed markets and emerging markets over the last five years [7][8] - American Century suggests considering international developed small cap strategies like ABDV and ABDS, with ABDV recently surpassing $10 billion in total assets under management [11] - Small cap companies with good valuations and profitability have historically been some of the best performers long term in US, non-US developed markets, and emerging markets [14] Market Outlook - Optimism surrounds potential trade deals, which is viewed as a positive factor [6] - Uncertainty in the current trade environment may create niche opportunities for small cap companies [15][16] - Diversification through exposure to smaller companies can provide opportunities often overlooked by large-cap focused strategies [13]

ETF Market Inflows and Trends - Year-to-date net inflows into ETFs reach $623 billion, on track for another trillion-dollar year [2] - The industry is potentially heading towards $1.3 trillion in flows for the entire year, driven by low-cost and active strategies [3] - Stronger sector flows observed in the past three months compared to the prior three months, indicating tactical adjustments and improving sentiment [3][4] Communication Services ETFs (XLC) - Increased inflows driven by price and fundamental momentum, with the sector outperforming the broader market [4] - Communication services is the only sector with increased earnings estimates over the last three months, largely due to AI [5] - Beneficiary of the "one big beautiful bill act" due to high R&D expenditure that can be expensed at a higher rate, boosting cash flow [5] - Considered a safe haven due to its service-oriented nature, making it less impacted by tariffs [5] Small Cap ETFs - July saw $2 billion of outflows, contributing to net outflows year-to-date, reflecting a less robust economic outlook [6] - Small caps face challenges due to below-trend growth expected in 2025 and 2026, high interest costs, and significant debt financing [6][7] - Small caps have experienced negative earnings growth over the last three years, contrasting with the sizable positive earnings growth of large caps [7] - Sentiment favors large caps with AI tech benefits, higher cash flow, and less debt service, making them less tied to the economic cycle [8] ETF Recommendations for Current Market - Communication Services ETF (XLC) is recommended due to fundamental momentum, high earnings expectations, cash flow, earnings revisions, and limited tariff exposure [11][12] - Aerospace and Defense ETF (XR) is suggested due to macro momentum from increased defense spending driven by geopolitical conflicts [12][13]

Market Outlook & Investment Strategy - The firm suggests rotating into value and small-cap stocks, as they have underperformed in the first half of the year [5] - The firm is at target for large-cap stocks but overweight in small-cap and non-US equities, believing there is better value in these areas for the second half of the year [6] - The firm has been bullish on Japan for a number of years due to strong improvements in corporate governance and better returns for shareholders [7] Currency & Economic Factors - The dollar index was down 11% in the first half of the year, marking its worst performance since 1973 [7] - The firm anticipates potential dollar weakness, especially if the Federal Reserve reduces rates by 100 basis points over the next year [8][9] - A softening dollar is seen as a reason to be overweight in developed markets outside the US [10] - Fiscal stimulus in Europe, particularly in Germany, is expected to be beneficial [6] Sector Analysis - There was a rotation out of higher multiple sectors like tech and AI into lower multiple sectors like consumer discretionary [2] - Financials are favored due to the prospect of less stringent regulation and potential capital returns [15][16] - The firm believes that progrowth policies and less regulation will benefit small and mid-cap companies more significantly [13] Risk Factors - Headline risk related to tariffs, particularly with Japan and China, remains a concern [16][17][18]