Tariffs still a drag even as US trade tone softens: Citi

Despite a more conciliatory tone from US officials in recent weeks, Citi says the tariff overhang remains a key risk for equity markets. Drew Pettit, Director of US Equity Strategy and ETF Research at Citi, noted that while recent signals from the US administration appear less aggressive, investors should not expect a return to pre-tariff conditions.“The tone has definitely changed in the past few weeks,” Pettit said, pointing to the initial market relief following a 90-day pause in new tariff measures. However, he cautioned that the shift in tone does not eliminate the damage already done in terms of treasury markets and dollar weakness.

“It’s less bad than feared on Liberation Day, but it’s still probably going to settle out higher than where we expected it at the beginning of the year…We’re still expecting a higher base case of tariffs,” he added.

Even a reduced tariff level, such as the 60% previously discussed during the US election campaign, remains a significant burden for sectors heavily reliant on China. “The more aggressive China tariffs have a greater impact on something like technology and consumer discretionary,” Pettit said, adding that earnings in these sectors are at the most risk.

India remains an overweight for Citi within emerging markets due to its limited exposure to trade and a really good domestic macro growth story.

However, it has downgraded US equities to a neutral rating. Pettit stated that while some high-quality US companies still offer solid earnings potential, broader tailwinds like strong gross domestic product (GDP) growth and earnings upgrades are starting to fade.
“The risk at this point is being underweight or not exposed to high-margin, high-quality US companies,” he added.In Asia, Japan joins India as an overweight in Citi’s portfolio. China, on the other hand, is rated neutral—not bearish—due to a mix of trade-related challenges and some ongoing structural opportunities.

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Among other emerging markets, Pettit stated Chile for its strong earnings rebound and said, “The cyclicality there [in Chile] probably priced in better than other places.” South Africa also finds a place in Citi’s strategy, driven by valuation.

According to him, it’s a “valuation call,” and the market has already “priced in a lot of bad news.”

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For the entire interview, watch the accompanying video

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