Problems with some US banks and signs of economic difficulties have encouraged the US bank to stay away from riskier investments, it said in a note.

Citi Global Wealth, part of Citigroup, is sounding a decidedly cautious note by stressing how, for the moment, its portfolios maintain a “quality income” stance, preferring firms which aren’t vulnerable to business cycle shifts.

The US banking group said its positioning, as seen by pharmaceuticals is its largest sector overweight, means that it is underweight of less well capitalised and indebted firms. 

“While the [US] Federal Reserve is committed to fighting inflation and holding rates `higher for longer’, there are increasing signs that the economy is weakening in a meaningful way,” Citigroup said in a note.

“The recent, unexpected banking crisis has also worsened the economic backdrop. We expect that credit availability will decline over the next 12 to 18 months and the cost of credit will rise meaningfully.”

Citigroup is not alone in striking a cautious note. Declining US purchasing manager index data and concerns about US and some other countries’ banks have created worries. 

The bank said that there is a recession to “get through.”

“There is a huge divergence between analyst estimates for corporate earnings and our view of them. As we discussed...analyst EPS estimates for the first quarter of 2023 are expected to reflect a 7.5 per cent drop in profits for the S&P 500 relative to a year ago. This seems reasonable.”

“Yet, looking at the same industry analysts’ second quarter estimates (April to June 2023), an immediate earnings rebound is likely. Analysts expect a 7 per cent improvement in Q2 2023 profits. This would be the equivalent of a +31 per cent annualised earnings growth rate using the same method that GDP estimates are based upon. The gains in profits they estimate are across the entire spectrum of market caps, though varying across industries. Our views of corporate earnings are very different than these analysts' estimates. In our expected case, a low in corporate profits may occur by the third quarter of this year,” it said. 

There are signs of weakening in the US economy, the bank said. 

“Private employment gains slowed to below +200,000 in March for the first time since 2020. Construction employment showed the first sizeable declines of the cycle. We remain confident that employers in manufacturing and housing will choose to reduce employment and related labour costs in the face of declining demand and rising wages. The recent, unexpected banking crisis has also worsened the economic backdrop,” the bank added.