Citi has just cut its rating on U.S. stocks to underweight. Here’s why and what it prefers.

Onto our call of the day, which is from Citi, which has been one of the more hawkish of the Wall Street banks in terms of its Fed expectations. Its global strategy team looked around the world and decided to cut its recommendation on the U.S. to underweight from overweight.

“Recession reality approaches as Fed hawkishness manifests in signs of slowing activity. We expect a weaker first half, and a stronger second half,” says the Citi team. It has a midyear target on the S&P 500
SPX,
+2.28%
of 3,700, but 4,000 for the year end. “We assume recession concerns and Fed hawkishness will peak during the first half of 2023, with markets anticipating recovery in the second half of 2023.”

Not that profitability will be so bad — it’s expecting just a 3% drop in earnings per share for the year, though that’s ahead of consensus expectation. And it’s expecting a leadership transition away from the past decade’s mega-cap growth names.

What Citi is now more optimistic about is Continental Europe, which it lifted to overweight from neutral. “Cheap valuations already discount much bad news. Economies should stabilize and rates peak later in the year,” says the Citi team, which already was overweight on U.K. equities.

Citi is neutral toward emerging markets (though overweight China and Brazil), and underweight Japan, which it says is vulnerable to an appreciation in the yen
USDJPY,
-0.97%.

More broadly, says the Citi team, buy the dips but don’t chase the rallies.

The buzz

The U.S. added 223,000 jobs in December — a little above expectations — as the unemployment rate fell to 3.5%. Average hourly earnings rose 0.3% over the month, a touch less than expectations.

U.S. stock futures
ES00,
+2.21%
 
NQ00,
+2.67%
turned higher after the jobs data, while the yield on the 2-year Treasury
TMUBMUSD02Y,
4.282%
turned lower.

Analysts focused on the fact that not just did average hourly earnings come in below estimates, but November’s growth was revised lower.

“November [average earnings growth] was also revised down to +0.4% from 0.6%, and all of this is coming in the context of the workweek having ticked down 0.1 hours in each of the last two months, so the overall wage picture is not quite as hot as it looked a month ago,” said economists at Jefferies.

There’s also a host of Fed speakers, including Gov. Lisa Cook, who may offer their thoughts on the jobs report. Overseas, Eurostat reported that prices slowed to 9.2% year-over-year in December from 10.1% in November, the slowest rate since August.

Tesla
TSLA,
+2.47%
may face further pressure after cutting prices in China for the second time in three months.

Bank of America
BAC,
+1.00%
and JPMorgan Chase
JPM,
+1.91%
were both downgraded to hold from buy at Deutsche Bank, which said new lows for bank stocks
BKX,
+2.54%
seem likely.

World Wrestling Entertainment
WWE,
+16.98%
shares rose on a Wall Street Journal report that former CEO Vince McMahon is planning a return and will pursue a sale of the business.

The House of Representatives may try again to install a speaker after Rep. Kevin McCarthy’s bid was rejected for the 11th time.

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BBBY,
-22.49%,
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U.K. Prime Minister Rishi Sunak’s plan for compulsory math studies until the age of 18 has provoked an uproar, including this foul-mouthed rant from actor Simon Pegg. 

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