Citi told investors in a note Wednesday that its historical review yields three principal lessons for markets as the Federal Reserve prepares to raise interest rates, and that such a move does not necessarily mark the end of an equity bull market.
The bank's economists expect a Fed hike this week. They also point to a broader shift among central banks: for the first time in years, more global monetary authorities are tightening policy rather than easing. Citi expects further rate increases from the Bank of Japan and the European Central Bank, and has also penciled in hikes from the Bank of England. Against this backdrop, 10-year U.S. Treasury yields have climbed above 5%.
Examining episodes back to the 1970s, Citi finds one consistent pattern around initial Fed hikes. "Global equities tend to wobble around the start of hikes, while still climbing 6/12m later," the note states. In concrete terms, stocks have risen only about one-third of the time in the three months following a first hike, but in the majority of cases 12 months out they are higher - up roughly 7% on average.
"It is not the first Fed hike that ends equity bull markets," Citi adds. The bank interprets the volatility accompanying the first move as a potential buying opportunity on a one-year horizon, even though it has historically paid to reduce exposure to Treasuries around such episodes.
Second, Citi highlights a regional rotation that tends to favor the rest of the world. The U.S. has consistently lagged while Japan and Europe have outperformed, the bank says. Within emerging markets, Brazil and India have tended to lead while China has lagged. The note cites these geographic patterns as important context for asset allocation decisions.
Third, Citi recommends a stylistic tilt. Investors should lean into value stocks and, to a lesser extent, cyclicals - a rotation that dovetails with the regional trends the bank describes.
Overall, Citi concludes the current environment calls for short-term caution given stagflationary risks stemming from geopolitics, but the bank reiterates its call for further earnings-driven gains in global equities through mid-2027.
Market markers mentioned in the note - among the tickers and indexes cited were EEM, IBOV, NSEI, US10YT=X and CSI300, reflecting moves in emerging markets, Brazil, India, U.S. Treasury yields and China.