'We are impressed:' Citi recommends buying next stock market dip with hot AI trade still coming ahead

“We are impressed how well the equity market has been trading in the light of higher oil, higher rates, and poor seasonals in Sep, even at a time when volatility in US rates is rising,” Citi said in a research note to clients published Sept. 25.

Citi recommended to “stay the course” and it expected a stock market drop in the run-up to the Nov. 3 midterm election. It added it was waiting for “a pull-back to add more risk because a pullback is typical after a first Fed hike (rather than before) and because the market also tends to pull back into the midterms before the typical year end rally takes over.”

‘The AI trade will continue’

Citi said U.S. equities will remain attractive since the AI buildout is only gathering momentum.

“We prefer the US as we still believe that the AI trade will continue. Emerging Asia is the other candidate, and an attractive candidate when the time comes to add more risk,” Citi analysts said. “The US is also more insulated from renewed oil upside.”

Other financial analysts are also keeping track of emerging economies in Asia. J.P. Morgan recently pointed to the Indian stock market as a “safe haven” for AI-exposed portfolios. Indian companies are undergoing a period of remarkable growth, and the Indian stock market hasn’t been taken over by explosive growth from the AI boom like Wall Street.

Citi analysts observed that U.S. equities have managed to “decouple” economic concerns from the ongoing Iran war, which has set off inflation that’s most visible in diesel and gas prices. It did issue an optimistic forecast on when the Strait of Hormuz, the vital commercial shipping lane, will reopen and predicted oil prices drifting down to $70 per barrel by the fourth quarter.

“Short term stress is still very plausible, even as by the end of the year, the [Strait of Hormuz] is likely to be open for business again,” Citi said.