Citi Warns of Increased Volatility as Bull Market Faces New Challenges

Citi's team, led by strategists including Beata Manthey, is signaling a bumpier ride ahead for the equity bull market. The bank points to mounting US-China trade tensions as a central source of uncertainty, suggesting that unresolved geopolitical factors could rattle investor confidence.

As companies gear up for global earnings season, much of the expected earnings per share (EPS) growth seems baked into current prices across major markets. That leaves the equity rally vulnerable if firms come up short. European stocks, in particular, have seen downgrades in EPS estimates concentrated in internationally-exposed sectors that have trailed their more domestically oriented counterparts through the year.

Citi's outlook isn't all gloom, though. They anticipate roughly a 5% gain for European equities by mid-2026 as EPS momentum spreads more evenly. Sector-wise, technology and banks receive a thumbs-up, while healthcare is considered a reliable defensive choice. Cycle-dependent sectors like automobiles remain out of favor given their weak earnings trends.

Valuation levels are pinpointed as a potential choke point-if earnings fail to impress, stretched multiples could clip further upside. The firm's stance reflects cautious optimism but acknowledges a rougher patch lies ahead. So, while the bull isn't done yet, expect it to navigate some choppy waters before settling into smoother territory.