Citi's Scott Chronert on 2025 Barbell Approach: Growth, Defensive, and Cyclical Sectors

Market Outlook and Volatility

• 💡 The S&P 500 fundamentals are considered strong, though negative revisions are possible in Q1 reporting due to tariffs.
• ⚠️ Volatility was expected at the start of the year, and the market is currently navigating maximum uncertainty regarding policy impacts.
• 📈 A roughly 10% pullback from recent highs has occurred, with the Mega Cap Growth cohort (Mag 7) experiencing a more significant 20%+ decline.

Sector Strategy for 2025

• 🎯 Citi's strategy for 2025 involves a "barbell approach", balancing growth, defensive, and cyclical sectors.
• 📈 Healthcare is an overweight sector, with continued confidence in this trade.
• 🚀 Energy is favored on the cyclical side, showing positive performance.
• 💬 Communication Services (including major internet companies) and Semiconductors are also advocated for, with semiconductors showing a rebound.

Tariff Impacts and Margins

• ⚠️ Tariffs are viewed more as a gross margin issue than a direct inflation driver.
• 📉 Consumer sentiment is weakening, making it difficult for corporates to pass on tariff-related costs.
• 💰 Companies are expected to absorb some of the tariff costs, impacting gross margins, and will seek cost-cutting or productivity enhancements to offset this.
• 🧩 The market is attempting to price in this uncertainty, and Q1 earnings calls will reveal how much of the tariff impact is already discounted by stocks.