Citi believes AI stocks could face continued selling pressure following the U.S. midterm elections, as concerns about artificial intelligence investment and infrastructure spending weigh on market sentiment.
In a research note published Friday, the Wall Street bank warned that the artificial intelligence investment theme remains vulnerable to further weakness. As a result, Citi currently favors European equities over U.S. stocks, citing more attractive market conditions outside the United States.
The bank also expects investors to continue shifting capital away from major technology companies as uncertainty surrounding AI financing and energy markets persists.
Citi Warns AI Stocks Could Remain Under Pressure
Historically, U.S. stock markets have often weakened ahead of midterm elections before recovering in the following months.
According to Citi’s seasonal analysis, the S&P 500 has the potential to deliver returns of approximately 3% to 4% during November and December.
However, the bank believes the latest market correction differs from previous election-related declines.
Rather than attributing the recent weakness primarily to political uncertainty, Citi identified concerns about artificial intelligence financing and rising oil prices as more significant factors.
These pressures have complicated the outlook for AI stocks, particularly companies whose valuations depend heavily on continued investment in advanced computing infrastructure.
Consequently, the bank remains cautious about the near-term performance of the technology sector.
AI Data Center Investment Faces New Challenges
Despite its cautious outlook, Citi continues to expect substantial investment in artificial intelligence data centers.
The bank believes demand for computing power remains strong enough to support additional infrastructure development.
However, Democratic gains in the U.S. midterm elections could influence where new facilities are built, how they are designed, and how quickly construction projects move forward.
Potential changes in regulatory oversight and infrastructure approvals could introduce additional uncertainty for companies involved in developing AI technology.
This would be particularly challenging for businesses supplying the equipment needed to expand artificial intelligence infrastructure.
Semiconductor manufacturers and other hardware providers could face pressure if construction schedules slow or major investment projects undergo revisions.
Although long-term demand remains favorable, Citi suggests that changes to the pace of development could create difficulties for AI-related companies in the near term.
Citi’s Market Indicator Signals Growing Technology Risks
Citi also highlighted growing concerns about the performance of America’s largest technology companies.
The bank monitors a proprietary indicator known as its “Generals” index, which measures how many of the seven largest S&P 500 companies are trading below their 200-day moving averages.
This widely followed technical indicator helps investors assess longer-term price trends and potential changes in market momentum.
According to Citi, the index is approaching a level that could trigger a cautionary signal.
Such a development would suggest increasing weakness among the largest companies responsible for driving much of the broader stock market’s recent performance.
The bank therefore anticipates further sector rotation, with investors potentially reducing their exposure to technology stocks while seeking opportunities elsewhere.
Iran Conflict and Oil Prices Add to Market Uncertainty
Beyond concerns surrounding artificial intelligence, Citi also examined the potential impact of the U.S. midterm elections on the conflict involving Iran.
The bank said the election results have not yet produced a clear change in the direction of the war.
However, Citi does not currently anticipate an immediate escalation in hostilities.
One factor supporting this assessment is the expected arrival of a third U.S. aircraft carrier in the Persian Gulf, which the bank indicated was not scheduled until mid-to-late November.
Nevertheless, geopolitical tensions remain an important consideration for global investors.
Changes in the conflict could influence oil prices, inflation expectations, and financial market volatility.
Energy price movements are particularly relevant because they affect corporate operating costs and the monetary policy outlook across major economies.
Citi Favors European Stocks Over U.S. Equities
Following the U.S. midterm elections, Citi increased its exposure to risk assets. However, the bank chose to direct that exposure toward markets outside the United States.
European stocks have emerged as its preferred investment opportunity.
According to Citi, continued uncertainty surrounding AI stocks makes U.S. equities less attractive in the near term.
Meanwhile, the recent decline in oil prices could provide greater economic benefits to European companies.
Europe remains sensitive to energy costs, meaning lower oil prices could ease operating expenses and reduce inflationary pressures.
Additionally, declining energy prices could give the European Central Bank greater flexibility to adopt a more accommodative monetary policy.
A less restrictive interest rate environment could support economic activity and improve sentiment toward European equities.
These factors help explain why Citi currently sees stronger relative opportunities in European markets.
Stock Market Outlook: Could Europe Outperform Wall Street?
Citi’s latest assessment reflects a cautious approach to the U.S. technology sector despite historically favorable seasonal patterns following midterm elections.
The bank remains confident that artificial intelligence infrastructure will continue expanding over the longer term.
However, uncertainty surrounding project financing, construction timelines, and potential regulatory changes could continue weighing on semiconductor companies and other AI-related businesses.
At the same time, weakening momentum among major U.S. technology stocks suggests investors may increasingly diversify into other sectors and international markets.
European equities could benefit from this shift, particularly if lower oil prices ease inflation and encourage a more supportive European Central Bank policy stance.
Ultimately, Citi expects European stocks to outperform U.S. equities in the near term, even if the broader American stock market experiences a seasonal recovery.
For investors, the bank’s analysis highlights the importance of distinguishing between the long-term growth potential of artificial intelligence and the shorter-term financial risks affecting AI stock valuations.
