Citi told investors on Friday that global stock markets are exhibiting the most "froth" recorded on its internal Bear Market Checklist (BMC) since the global financial crisis, though it stopped short of declaring markets to be in a state of outright overexuberance.
In the note, analyst Beata Manthey reported that Citi's BMC reads 10 out of 18 flags globally - the highest total seen since the run-up to the 2008 crisis. Specific regional readings show the United States at 11.5 out of 18 and Europe at 5 out of 18.
"The BMC is now at its frothiest level since the GFC, with flags rising steadily," Manthey wrote in the briefing. Citi also cautioned that the checklist has a historical tendency to accelerate after it moves into double-digit territory.
"Once the count reaches double digits, it has historically tended to rise more rapidly, signaling a potential acceleration in risk," Manthey added, underlining the bank's view that additional flag turn-ons could mark a meaningful shift in market dynamics.
Citi identified several contributors to the elevated BMC reading. These include stretched valuations across multiple market segments and an upswing in investor optimism. The bank also pointed to elevated capital expenditure growth tied to artificial intelligence initiatives and a recent pickup in initial public offering activity and broader equity issuance. By contrast, credit spreads remain tight, a condition Citi described as a more positive element in the current backdrop.
Despite the higher reading, Citi emphasized that current conditions are still below levels observed before prior major downturns. The BMC climbed to 17.5 out of 18 in 2000 and reached 13 out of 18 ahead of the global financial crisis, figures cited by the bank to provide historical perspective on how the checklist behaved in earlier cycles.
Reflecting these dynamics, Manthey wrote that Citi continues to be constructive on equity markets through the end of the year. However, she warned that if additional flags continue to switch on, "this would increasingly signal that dips should not necessarily be bought."
Contextual note - The BMC reading, its regional splits, and the factors contributing to the current elevated reading are those reported by Citi in the firm's investor note. The bank's constructive near-term view and its caution about further flag accumulation are taken directly from that note.