Citi throws in the towel on hyperscalers after a key market bet misfires

By Jamie Chisholm

Hyperscalers and growth plays have underperformed amid a sharp rotation

Meta is one big tech company whose shares have not done well in recent weeks

Recent weakness in stock markets has helped convince Citi strategists to throw in the towel on one of their main trades: being long hyperscalers and growth stocks.

In a note published over the weekend, head of Citi equity trading strategy Stuart Kaiser admitted his prediction that many AI-focused equities would benefit from a well-received earnings season and light positioning by investors has not worked.

"We shifted positive ahead of 3Q earnings with a preference for large cap growth, hyperscalers and strong vs. weak balance sheet stocks," Kaiser said.

Instead, the market has witnessed a rotation out of many big technology growth plays and into perceived value stocks, he observes. Citi's tactical basket of growth equities lagged its value basket by 4.1% last week and by a huge 32% over the past month.

Kaiser said that such rotation in the market required a catalyst, and it came in the form of disappointing earnings. "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."

Consequently, the S&P 500 SPX shed 1.9% last month but hyperscalers lagged by 8.7%, according to Citi.

"The combination of light positioning and hopes for strong earnings has not worked. We close down our positive views on hyperscalers and growth," said Kaiser.

However, he said Citi remains long strong vs. weak balance sheet stocks, and they continue to see "health care AI as the best option for growth."

Kaiser also said that after the midterms elections Citi is "hopeful for relief in areas like power generation, but uncertainty is too high to pursue that quite yet."

The market has been able for some time to overcome the headwinds of rising energy costs, higher bond yields and wider credit spread, Kaiser acknowledged.

But he added: "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."

-Jamie Chisholm

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11-02-26 0608ET