Citi Downgrades Wall Street to Neutral Amid Artificial Intelligence Safety Concerns
Investment giant Citi has downgraded Wall Street to neutral amid AI safety concerns, citing potential slowdowns in artificial intelligence development and rising bond yields.
Amid growing concerns over artificial intelligence safety, investment giant Citi has downgraded Wall Street to a neutral rating, shifting from overweight. In a note led by Stuart Kaiser, head of U.S. equity trading, analysts warned that potential slowdowns in AI model development could compress corporate profit forecasts and challenge the foundational thesis driving the current market rally.
Hedging Against AI Risks
To hedge against potential pullbacks in the tech sector, Citi suggests utilizing put options on the QQQ exchange-traded fund, which tracks the Nasdaq 100, or the SMH semiconductor ETF. Put options grant investors the right to sell assets at a specific price by a set date, offering portfolio protection amid mounting market volatility.
A potential slowdown in AI model development could compress forecasts and weaken the central pillar of the equity rally.
Beyond AI-related uncertainties, Citi pointed to several structural headwinds, including upcoming midterm elections where Republicans risk losing control of both the House and Senate, multi-decade high bond yields, and climbing crude oil prices.
Federal Reserve and Market Resilience
Citi forecasts that the S&P 500 will likely trade within a narrow 2% range of its August highs in the near term, keeping investors on the sidelines. Meanwhile, Goldman Sachs adopted a similarly measured perspective, noting that while monetary tightening often triggers a temporary 2% dip in the S&P 500 over three months, long-term fundamentals remain robust with an average 12-month return of 9%.
Markets are currently pricing in an estimated 92% probability of a quarter-point interest rate hike by the Federal Reserve, as strong corporate earnings and resilient balance sheets continue to support the broader economic outlook.
