Citi's Drew Pettit shares his investing playbook for late 2025

Key Concepts

• Citi's Bullish Playbook: A strategy focusing on specific stock selection narratives.
• Five Stock Selection Narratives: AI at a reasonable price, positive ROE trend, inflecting growth, return on growth CapEx, and high earnings sharp.
• Inflecting Growth Theme: A counterintuitive theme focusing on cyclical stocks expected to show significant growth in the next couple of years after a period of earnings decline.
• Cyclicals: Stocks of companies whose performance is tied to the overall economic cycle.
• Earnings Downtrend: A period where company earnings are declining, estimated to be down 20% or more from their post-pandemic peak.
• Tariff Story: The impact of tariffs on companies and their ability to manage these costs.
• High Beta: Stocks that tend to move more than the overall market, indicating higher volatility and potential for greater gains or losses.
• New Defense: A strategy that moves beyond traditional defensive stocks, focusing on relatively attractive opportunities.
• ROE (Return on Equity): A measure of profitability that calculates how much profit a company generates with the money shareholders have invested.
• CapEx (Capital Expenditures): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, and equipment.

Citi's Bullish Playbook and Stock Selection Narratives

Citi is maintaining a bullish stance, identifying five key stock selection narratives for investors. These narratives are:

1. AI at a Reasonable Price: Investing in Artificial Intelligence related companies that are not overvalued.
2. Positive ROE Trend: Focusing on companies demonstrating a consistent upward trend in their Return on Equity.
3. Inflecting Growth: Identifying companies poised for a significant increase in their growth rate.
4. Return on Growth CapEx: Investing in companies that are effectively generating returns from their Capital Expenditures aimed at growth.
5. High Earnings Sharp: Targeting companies with substantial and rapid increases in their earnings.

The Counterintuitive "Inflecting Growth" Theme

Drew Pettit from Citi highlights the "inflecting growth" theme as the most counterintuitive. While the market is focused on government reopening data and potential Federal Reserve actions, the real opportunity lies in cyclical stocks. These stocks have experienced an earnings downtrend for three years, with earnings likely down 20% or more from their post-pandemic peak. Pettit argues that these cyclicals are where the best growth inflection is expected in the next couple of years, suggesting a significant trend change that should attract investor interest.

Key Data Points for Investor Guidance

The upcoming period will provide a wealth of data, including government economic reports, holiday sales figures, and corporate earnings reports in January and February. For investors to navigate these narratives, the most important data will be:

• Consumer Data: A "mosaic" of information will be crucial for understanding consumer behavior.
• Tariff Impact: The ability of companies to manage tariff impacts will be a key indicator.

Pettit explains that for cyclical and inflecting growth themes, the current situation is such that as long as data doesn't worsen significantly, employment holds steady, spending is "just okay," and companies can manage tariff impacts, earnings are likely to look "pretty good." The focus is on moving past the negative data ("getting some of the bad in the rearview mirror") and observing macroeconomic indicators that are weaker but not at recessionary levels.

The Role of Technicals vs. Fundamentals

Citi's themes are fundamentally based, with technical analysis not being a primary factor in their strategy. However, Pettit acknowledges that "price always matters." In the context of these themes, which are often high beta, technicals can be relevant. If an investor has conviction that a recession is unlikely and that growth companies can continue to generate returns on CapEx and compounders can sustain earnings growth, then they should not hesitate to embrace higher beta exposure.

Investment Horizon and Strategy for High Beta Themes

The strategy of investing in high beta themes is expected to extend into 2026. Pettit advises investors to consider putting money to work during pullbacks for these higher beta themes. Alternatively, individuals with cash or fixed income allocations on the sidelines should view this as an opportune time to buy equity risk, particularly from the end of 2025 and into 2026. When the market is fully valued, both fundamentals and idiosyncratic company stories become more important.

Redefining "Defense" in the Current Market

Pettit addresses the ineffectiveness of traditional defensive stocks in the current market. The problem with traditional defensives is that in an up market, while they might offer protection during pullbacks, they recover much slower. Citi's approach to "new defense" is to move beyond simply buying stocks with low earnings volatility. Instead, the focus is on identifying "relatively attractive" opportunities, implying a more nuanced and opportunistic approach to defensive positioning.

Conclusion and Key Takeaways

Citi's bullish outlook is underpinned by five distinct stock selection narratives, with "inflecting growth" in cyclical stocks being a particularly compelling, albeit counterintuitive, theme. Investors are advised to focus on fundamental data, particularly consumer trends and the impact of tariffs, to identify opportunities. While price is always a consideration, the strategy emphasizes embracing higher beta during periods of market uncertainty, with an investment horizon extending through 2026. The concept of "defense" is also being re-evaluated, moving beyond traditional low-volatility plays to a more opportunistic approach. The core message is to identify companies with strong fundamentals that are poised for growth, even in a fully valued market.