Strategists at Citi downgraded U.S. equities after a strong first half of 2023, saying an economic slowdown will weigh on company earnings. The Wall Street firm slashed the rating to neutral from overweight Monday and said the S & P 500 will pull back 9% to end the year at 4,000. The equity benchmark closed Friday's session at 4,398.95. "After a solid 1H, US outperformance may go on pause," Citi strategists said in a note. "Our US Strategy team thinks megacap Growth is set for a pullback, while US recession risks could still bite." The market ended the first half of the year with a bang as the S & P 500 popped 15.9% for its best first half since 2019. The tech-heavy Nasdaq Composite surged 31.7%, for its best first half since 1983. However, the rally has cooled in July as investors anticipate more rate hikes from the Federal Reserve. The S & P 500 shed 1.2% last week. Citi said the run-up in artificial intelligence-related stocks could be overdone. Meanwhile, other headwinds could put pressure on the market, including a potential recession and waning inflows into equities. "Growth may be set for a pullback as AI euphoria enters a digestive phase. Recession risks remains elevated. Volatility tends to rise after a sharp fall in market breadth. Global inflows boosting the Japanese equities should peak soon," Citi said. Citi's forecast of 4,000 is below the average year-end forecast of 4,227 from Wall Street strategists, according to CNBC Pro's market strategist survey , which rounds up the top 15 strategists' predictions. "Our market targets now point to near-term downside, with a more constructive medium-term view," Citi said. "'Soft landing scenarios look plausible, but tightening credit conditions remain a key headwind."
