[]The artificial-intelligence craze hasn’t moved Citigroup’s year-end target for the S&P 500, but the bank’s equity analysts are keeping an eye out for what they’ve labeled the “p-AI-n trade.”
[]That would be the pain trade inflicted by AI enthusiasm or a potential pause or pivot in the Federal Reserve’s interest-rate hiking cycle, according to a Citi Research note dated June 2. Citi analysts, led by managing director Scott Chronert, currently have a year-end target of 4,000 for the S&P 500.
[]“A combination of artificial intelligence expectations and eventual end to Fed rate hikes have us looking over our shoulder for upside risk related to a flow shift and sentiment change in favor of equities,” the analysts said in the note. The S&P 500 SPX, +0.24% closed Monday at 4,273.79, up 11.3% so far in 2023.
[]Still, Citi analysts are “fundamentally confident” in their year-end forecast for the S&P 500 along with an expected trading range around it of 3,800-4,200, according to the note. Megacap growth and technology stocks are driving the index’s gains this year, but recession worries remain, they said.
[]“The recent market action continues to tell us that, under the index surface, ongoing recession risk is being priced in,” the analysts wrote.
[]“How does one get the conviction to make a longer-term investment call related to generative AI impacts when expectations for an intermediate-term recession scenario remain front and center,” they said in the note. “This, of course, defines the current ‘p-AI-n’ trade.”
[]In their view, an S&P 500 target of 4,000 represents “fair value” based on an expectation for “a mild recession.” That price level aligns with a 18-19x multiple on earnings per share of $213 for the index, according to the note.
[]Meanwhile, the trading range that the Citi analysts expect to see around their year-end target is “now being tested to the upside.”
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[]Chip maker Nvidia Corp.’s NVDA, -1.32% recent guidance around AI “pulled forward many investors’ expectations for timing of the theme’s influences,” according to the Citi note.
[]“Our best guess as to how artificial intelligence and generative AI evolves from here is that it will gradually go from a unique, differentiated, and novel theme to another basic building block of our everyday lives and corporate processes,” the analysts wrote. “There is a subtle longer-term valuation tailwind likely to result from this.”
[]Read: AI buzz pushes tech stocks higher — but here’s why the ripple effect may be limited
