Key insights
- Citi warns global stock markets exhibit the highest 'froth' since 2008, with its Bear Market Checklist at 10/18 globally and 11.5/18 in the US. Stretched valuations, optimistic sentiment, AI capex, and increased IPOs are key drivers. While not yet at peak overexuberance, Citi notes the checklist historically accelerates past double digits, signaling rising risks. Despite remaining constructive to year-end, the bank suggests caution against buying dips if more risk flags appear
Investing.com -- Global equity markets are showing their highest level of froth since the financial crisis, though conditions have not yet reached the point of outright overexuberance, Citi told investors in a note on Friday, maintaining a constructive stance while flagging rising risks.
Analyst Beata Manthey stated that Citi's proprietary Bear Market Checklist now stands at 10 out of 18 flags globally, its highest reading since the global financial crisis.
The U.S. scores 11.5 out of 18, while Europe registers 5 out of 18. "The BMC is now at its frothiest level since the GFC, with flags rising steadily," Manthey wrote.
Citi cautioned that the checklist has historically tended to accelerate once it crosses into double digits.
"Once the count reaches double digits, it has historically tended to rise more rapidly, signaling a potential acceleration in risk," Manthey noted.
Contributing factors include stretched valuations across several market segments, increasingly optimistic investor sentiment, elevated AI-driven capital expenditure growth, and a pickup in IPO activity and equity issuance. Credit spreads remain tight, which Citi characterized as a more positive signal.
Despite the elevated reading, Citi said current conditions remain below levels seen ahead of past bear markets. The checklist reached 17.5 out of 18 flags in 2000 and 13 out of 18 ahead of the global financial crisis.
"We therefore remain constructive on equity markets to year-end," Manthey wrote, adding that should more flags continue to turn on, "this would increasingly signal that dips should not necessarily be bought."