Markets may be underpricing tariff risks, earnings could take a hit: Citi’s Drew Pettit

Markets may be underestimating tariff risks, which could lead to earnings downgrades if they persist, according to Drew Pettit, Director-US Equity Strategy at Citi.While companies and investors have adjusted their risk-reward balance, the impact of tariffs remains uncertain. “We are underpricing it,” Pettit said, warning that earnings could take a hit if tariffs stay in place.

Uncertainty is expected to linger through the first half of 2025, though some clarity may emerge on April 2. However, Pettit cautioned that this won’t be an immediate fix. “It’s not like it’s going to turn a switch on and then just drive a whole bunch of investment right away,” he said.

Despite the uncertainty, Citi maintains its S&P 500 targets at 6,100 for mid-year and 6,500 for the full year, citing potential benefits from tax policy and deregulation.

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On emerging markets, Citi remains neutral. Pettit stated that China, South Korea, and Taiwan are more exposed to US tariff risks, while India faces relatively lower risk. Amid trade concerns, investors are shifting toward safer assets like Treasuries, high-quality bonds, and gold.

Despite market volatility, Citi remains bullish on artificial intelligence (AI), which is a key driver of productivity. Pettit emphasized that AI investments remain essential, especially as companies navigate rising costs.

Also Read: India can absorb reciprocal tariffs, but BTA poses non-tariff risks: Ajay Srivastava of GTRI

He added that European markets face fewer tariff risks than the US and remain attractive, though some of their recent gains may already be priced in. Meanwhile, large-cap tech stocks have pulled back, but their earnings remain resilient, reinforcing confidence in long-term growth.

For the entire interview, watch the accompanying video

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