Citi closes hyperscaler views after growth basket trails by 32%

Citi’s tactical basket of growth equities lagged its value basket by 32%—nearly one-third—over the past month, the bank said, prompting strategists to close their positive views on hyperscalers and growth. The reversal ended one of Citi’s main trades: staying long hyperscalers and growth stocks amid recent stock-market weakness.

Stuart Kaiser, head of Citi equity trading strategy, made the reversal in a note published over the weekend. He acknowledged that his prediction had failed: many AI-focused equities were expected to benefit from a well-received earnings season and light investor positioning.

Kaiser said: “We shifted positive ahead of 3Q earnings with a preference for large cap growth, hyperscalers and strong vs. weak balance sheet stocks.” Instead, the market rotated out of many big technology growth plays and into perceived value stocks, according to Citi.

Kaiser tied the retreat to the performance gap between Citi’s baskets. His conclusion was blunt: “The combination of light positioning and hopes for strong earnings has not worked. We close down our positive views on hyperscalers and growth.”

What broke Citi’s hyperscaler trade?

Kaiser said the rotation required a catalyst, and disappointing earnings supplied it. “Headline earnings per share growth numbers may look good, but in many cases have been far short of a high bar with guidance muted relative to recent history.”

The S&P 500 shed 1.9% last month, while hyperscalers lagged by 8.7%, according to Citi. The published account names no basket constituents and gives no company-level earnings figures, so readers cannot test whether the 4.1% weekly and 32% monthly gaps came from a few names or broader weakness.

Takeaway: Citi’s earnings premise failed, and the bank withdrew the bullish hyperscaler call rather than defend it.

Where is Citi still bullish?

Even after closing its positive hyperscaler and growth views, Citi remains long strong-balance-sheet stocks rather than weak-balance-sheet stocks. Kaiser said the bank still views “health care AI as the best option for growth.”

He also said Citi would keep equity exposure in strong-balance-sheet and larger-cap stocks for the time being. His rationale was caution rather than a renewed broad-growth conviction: “We would keep equity exposure in strong balance sheet and larger cap stocks for the time being, given disappointing earnings relative to expectations that may not be enough to balance active credit, policy and oil risks.”

The published account names no companies in either basket and provides no company-level earnings, valuation or balance-sheet figures. That omission leaves readers unable to gauge concentration or judge whether the preference is broadly diversified. The caveat does not change Citi’s stated positioning, but it makes the strategy harder to evaluate against specific holdings.

Takeaway: Citi is retaining selected growth exposure while favoring large caps and stronger balance sheets over weaker balance sheets.

Why is Citi waiting on power generation?

After the midterm elections, Kaiser said, Citi is “hopeful for relief in areas like power generation, but uncertainty is too high to pursue that quite yet.” The bank has identified a possible post-election theme, but Kaiser did not specify what relief would mean, which securities would benefit or what conditions would trigger a position.

That caution comes after markets spent some time overcoming rising energy costs, higher bond yields and wider credit spreads, Kaiser acknowledged. His closing stance was to keep equity exposure in strong-balance-sheet and larger-cap stocks while active credit, policy and oil risks remained unresolved.

Takeaway: Power generation is a watchlist idea for Citi after the midterms, not yet a recommended trade.

For now, Citi’s preferred equity exposure remains large-cap stocks with stronger balance sheets. Its positive hyperscaler view has been withdrawn, while health care AI remains its stated growth preference and any power-generation move awaits more certainty after the midterms.