Citi's Stuart Kaiser on why he is 'cautiously siding with seasonal upside' in the market

Key Concepts

• Tech Rally: A significant increase in the stock prices of technology companies.
• Retail Investors: Individual investors who trade on their own behalf, rather than through an intermediary or professional manager.
• S&P Advance Decline Line: A technical indicator that measures the breadth of the market by comparing the number of advancing stocks to declining stocks.
• Mag-7: Refers to the seven largest technology companies in the S&P 500 index (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla).
• Bitcoin: A decentralized digital currency.
• Geopolitical Tensions: Conflicts or disagreements between nations.
• Mutually Assured Destruction (MAD): A doctrine of military strategy and national security policy in which a full-scale use of nuclear weapons by two or more opposing sides would cause the complete annihilation of both the attacker and the defender.
• AI Trade: Investments made in companies involved in artificial intelligence development and application.
• Credit Spreads: The difference in yield between two debt instruments of similar maturity but different credit quality.
• Balance Sheet Strength: A company's financial health as indicated by its assets, liabilities, and equity.

Market Analysis and Tech Rally

Stuart Keiser, City's Head of U.S. Equity Trading Strategy, discusses the recent rally in tech stocks. He attributes part of the surge to positive headlines, including those related to Google. Keiser notes that after a tough week of selling, retail investors appeared to step back into the market, with retail favorite stocks seeing a significant increase of approximately 5.5%.

However, he cautions that the rally was not uniformly positive across the market. The S&P advance decline line was negative, indicating more stocks were declining than advancing. While the "Mag-7" equal weight index rose by 3.5%, the remaining 493 stocks in the S&P 500 did not participate in the gains. This suggests that the rally was primarily driven by market leadership, which can be characterized as tech, growth, or AI stocks, and that the previous week saw aggressive selling in these areas. The current bounce could be influenced by seasonal factors, but positive headlines and a potential over-selling on Friday contributed to the recovery. The re-engagement of retail investors was also a positive factor.

Bitcoin's Influence on Market Sentiment

Keiser addresses the perceived outsized involvement of Bitcoin in market sentiment and trading. He acknowledges that investors are focused on Bitcoin and notes that on Friday, it was viewed as potentially leading the market lower. As a significant retail asset, its stabilization and decent run over the weekend provided confidence to the broader market. Keiser explains that Bitcoin's lack of a fair value makes it difficult to definitively attribute market movements to it, as it often gets "blamed and credited" for various shifts. However, he believes that its stabilization, after being a negative factor for risk sentiment, suggests that the market was experiencing "indigestion" rather than a full-blown market flush.

Geopolitical Factors and China-US Relations

The discussion touches upon geopolitical tensions, specifically concerning China and Taiwan. Keiser, preferring to focus on "checkers" rather than "global chess," states that any reduction in geopolitical tensions is positive. He believes that both China and the US operate under a principle of "mutually assured destruction," recognizing that a significant escalation in geopolitics or trade would be detrimental to both. From a market perspective, this understanding has narrowed the range of potential outcomes to a level that investors can manage and trade around. Consequently, any weakness in China-US headlines is viewed as a "buy the dip" opportunity until proven otherwise.

Institutional Caution on AI Trade

Keiser observes that institutional investors are becoming more "circumspect" and are auditing the "AI trade" more aggressively. He cites Oracle as a prime example, referencing its credit spreads and balance sheet strength. Keiser points out that the strongest balance sheets within the Mag-7 are rated at least AA minus, while Oracle is rated triple B. He notes that other tech companies with significant spending commitments have even lower credit ratings. This indicates a growing institutional focus on:

• Spending: The level and justification of expenditures.
• Balance Sheet Strength: The financial health and stability of companies.
• Revenue Generation: The ability of companies to demonstrate tangible revenue growth from their AI investments.

Keiser also provides a statistic indicating that the Mag-7's contribution to the S&P 500's market cap gains year-to-date is only about 40%, suggesting a broader participation in market gains beyond these mega-cap tech stocks.