It was bound to happen. A major U.S. investment bank, Citi, has downgraded U.S. stocks. Tariffs have created too much uncertainty, and so has the possibility of a gross domestic product (GDP) retreat. U.S. stocks are no longer as attractive as they have been for several months. Surprisingly, Citi said it liked possible returns from the Chinese markets better.
The case for the Chinese upgrade was simple. The nation has shown unexpected advances in artificial intelligence, led by the release of DeepSeek. The central government has decided to boost the tech sector with large investments. Citi also sees valuations in the overall Chinese market as “cheap.”
The Inevitable
Is this a market crash?
The sell-off has happened quickly. Yesterday, the Nasdaq dropped 4%, the worst single-day performance of the year. It is down by 10% since the start of January. The value of market leader Nvidia Corp. (NASDAQ: NVDA | NVDA Price Prediction) has dropped 20% over the same period, with most of that decline being in the past week. Tesla Inc. (NASDAQ: TSLA) shares are down 45% over the same time. These two stocks are among the major catalysts of the year-long market surge, which appears to be ending.
One of Citi’s comments was cryptic: “The news flow from the US economy will likely undershoot the rest of the world in coming months.” Presumably, this means “news” about GDP and tariffs. Wall Street has tumbled because of the uncertainty about trade and the possibility that tariffs could wreck some sectors like automotive. The “news” has already started.
The Citi call is one of several anxieties about the U.S. market. A widely followed economic model run by the Atlanta Federal Reserve, called GDPNow, signaled a GDP drop of 2.8% in the current quarter. Many analysts believe the Atlanta Fed program is limited and should not be used as a major forecasting tool.
Leaving aside Citi’s forecast. The S&P 500 has been up more than 20% in both 2023 and 2024. There has not been a market correction in almost a year. Valuations are historically high.
The market is unsteady and has already gone through a violent sell-off. The next few days will tell whether its short-term health is in trouble.
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