The U.S. stock market is presently witnessing an extraordinary period, with the S&P 500 Index trading at all-time highs.
This remarkable rally has seen approximately $10 trillion added to the value of U.S. stocks since the index was on the verge of a bear market just two months prior.
This market buoyancy persists despite a multitude of looming risks, including President Donald Trump’s impending tariff deadline, ongoing geopolitical tensions in the Middle East, and increasing economic uncertainty.
Kate Moore, the recently appointed chief investment officer of Citigroup Inc.’s wealth division, articulated this sentiment in a recent interview with Bloomberg, stating, “If I’m honest, I’ve been a little uncomfortable with this rally.”
She highlighted a series of “warning flags” that, in her view, are not adequately impacting investor sentiment or receiving sufficient attention.
Emerging cracks and shifting expectations
A key area of concern, as identified by Moore, lies in the moderation of corporate earnings expectations.
At the beginning of the year, Wall Street analysts had projected a robust nearly 13% increase in profits for S&P 500 companies, according to data from Bloomberg Intelligence.
However, in less than six months, this forecast has been significantly revised downwards to a more modest 7.1%.
Concurrently, the composition of the stock market’s gains indicates a growing concentration around a limited number of companies.
While the standard S&P 500 Index continues its ascent, largely propelled by the strong performance of major technology entities such as Nvidia Corp., Microsoft Corp., and Meta Platforms Inc., its equal-weighted counterpart remains 3% below the record level it achieved half a year ago.
Moore, who assumed her role as CIO at Citi’s wealth business in February, after a tenure as head of thematic strategy for BlackRock’s $50 billion global allocation business, also voiced reservations about the market’s apparent dismissal of potential tariff impacts.
She further characterized the enthusiasm surrounding prospective interest rate cuts as potentially misplaced.
Policy uncertainty and economic headwinds
As President Trump’s self-imposed July 9 tariff deadline rapidly approaches with limited progress on trade deals, Moore suggests that investors might be underestimating the financial repercussions of these levies.
She underscored globalization’s significant role in the margin expansion observed over the past two decades, implying that companies will indeed experience the effects of new tariffs.
Furthermore, Moore cautioned against excessive optimism regarding interest rate reductions, explaining that such policy adjustments would likely stem from a response not only to cooling inflation but also to a broader deceleration in overall economic activity.
She emphasized that a “cooling overall activity is not the perfect environment for massive risk on.”
Wall Street analysts now anticipate that second-quarter year-over-year profit growth for S&P 500 companies will be the weakest in two years, projected at 2.8%, according to Bloomberg Intelligence data.
This economic softness is exemplified by FedEx Corp.’s recent warning of lower-than-expected profits for the current quarter, attributed to the ongoing impact of the trade war.
Additionally, economic data indicates that U.S. consumer spending in the first quarter experienced its slowest growth since the onset of the pandemic, driven by a sharp deceleration in outlays for various services.
Moore’s primary concern revolves around a lack of policy clarity, observing that “The longer that uncertainty lasts — the longer we have flip-flops on policy and wait-and-see mileposts keeps moving — the more that leads companies to pull back on some of the investment and capital expenditures and hiring.”
Strategic adjustments and enduring investment themes
Despite these broader economic apprehensions, Moore maintains a degree of confidence in the sustained strength of earnings within the artificial intelligence and technology sectors.
She notes that these investment themes have consistently demonstrated resilience across various economic cycles.
Moreover, even amidst a potentially deteriorating economic environment, she considers U.S. large-cap companies to be “the most attractive house on the street” in terms of available investment options.
Since joining Citi Wealth, Moore has initiated several strategic adjustments to the firm’s investment portfolios.
These changes include a reallocation of assets, shifting from small-cap companies to large-cap entities, a decision predicated on the expectation of a more challenging environment for smaller firms in terms of both growth prospects and profit margins.
She also disclosed the addition of gold to the portfolios, characterizing its inclusion as a “ballast” — a measure to provide stability and act as a hedge against market volatility.
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