Pettit linked the current reaction in financial stocks to what already happened in software stocks. He said investors often adjust valuation assumptions when new technology emerges, even if near-term earnings remain strong.
He said, “It’s not about the near-term earnings. Financials looked really good during earnings season. Software stocks before that looked good during earnings season, and had numbers revised up for the full year and even next year. When we have a disruption, when there’s new tech and innovation in any industry, it’s a problem for the future. It is what we call a terminal multiple problem.”Also Read | No finality to 18% tariff, trust deficit remains: Ex-WTO envoy Dasgupta on India-US trade deal
Pettit explained that small changes in long-term valuation multiples can cause large stock price moves today. He said software’s recent decline was driven by investors lowering future valuation expectations rather than weakening fundamentals. He added that the same setup could apply to financial stocks if investors cut long-term growth assumptions.
On positioning, Pettit said Citi still sees opportunity in both growth and cyclical stocks but believes investors should balance exposure across sectors.
He said, “We still like owning cyclical risk, but understand that no risk, whether it’s on the growth side or the cyclical side of the market in the US, is cheap right now, so we want to own both so we can manage these aggressive rotations from one area to the next.”Pettit said the firm continues to prefer diversified global exposure. Citi is overweight emerging markets, positive on Japan, neutral on the US, and underweight the UK and Australia.
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Pettit said, Citi remains neutral on India within emerging markets but sees potential upside from trade developments and possible foreign investment inflows. However, he said other Asian markets currently rank higher in Citi’s preference list.
He said the firm focuses on earnings revision trends when assessing emerging markets and may review its stance on India in future quarterly reviews.
Pettit also highlighted changing investor behaviour across asset classes. He said investors are increasing international equity exposure while also using fixed income as a stability allocation. He pointed to ETF flow data showing US investors bought more international equities than domestic equities in January, marking a shift toward global diversification.
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