Citi: Don't worry about Big Tech fueling 2023's rally. Worry about earnings instead.
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Citi brushed away worries that Big Tech has represented an outsized portion of the rally so far in 2023, saying this concentrated leadership is no reason to lose faith in a further advance. However, the bank also raised concerns about "narrow EPS growth," which it sees as a much bigger danger to future gains than a lack of broad participation.
As the major U.S. equity averages have climbed in 2023, some market watchers have worried that too much of the gains have concentrated in a handful of Big Tech names. Citi, on the other hand, says the condensed leadership is not a motive to sell the market.
Citi noted that global equities have risen roughly 12% in 2023, with the advances concentrated to a few megacap tech stocks. The financial institution cited data showing that the seven largest stocks in the S&P 500 are now responsible for nearly all of the indexâs YTD returns.
"What does poor U.S. (and thus global) breadth mean for equities? We find that narrowing leadership alone is not a reason to the sell the market; stocks trade higher on average after markets narrow, though volatility also rises," Citiâs global equity research team stated on Friday in an investor note.
The firm added: "Going forward, weâre more concerned with narrow EPS growth than narrow market leadership."
Expanding on the point, Citi said it remains "cautious" about the U.S. and Europe, predicting a U.S. recession to start in Q4. As a result, "we think bottom-up EPS forecasts are still too optimistic."
"Indeed, narrowing EPS growth ... might be more of a headwind than narrowing performance," the firm stated. "Tightening central bank liquidity could also prove more challenging."
Although it was essentially flat by midday trading, the S&P 500 (SP500) (SPY) (IVV) (VOO)hit a new 52-week trading high on Friday morning. The benchmark index pushed to 4,448 -- a level not seen since late April of 2022.
See how some of Wall Streetâs megacap names such as Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG) (GOOGL), and Nvidia (NVDA) have stacked up against the broader S&P 500 (SP500) in the below 2023 year-to-date chart.

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