Citigroup CEO Jane Fraser thinks recent S&P 500 weakness isn’t a harbinger of a dot-com-style reckoning. Instead, Fraser said at a conference last week that the correction caused by a sell-off in technology will be shallow and over sooner rather than later.
When asked by Sara Eisen on CNBC whether the selling suggests something “deeper or longer,” Fraser bluntly replied, “I don’t think so.”
Given that Citigroup is the 12th-largest bank on the planet with over $2.6 trillion in assets and over 217,000 employees, it has its pulse on the economy and markets, making Fraser’s comments worth considering.
Fraser says S&P 500 drop not surprising, given ‘priced to perfection’
The stock market is in the fourth year of a bull market, largely due to surging spending on everything and anything AI. Goldman Sachs expects hyperscalers like Google to spend $1.2 trillion on AI next year, and, according to a Bank of America note shared with me, AI activity accounted for about 1% of GDP growth through the first nine months of this year.
Fraser believes that corrections can be healthy, a long-held Wall Street belief, because removing frothiness means money on the sidelines that can later be redeployed. She appears unshocked by the Nasdaq’s 10% retreat from its summertime highs, or last week’s 5.5% drop on November 5.
“I don’t think any of us should be particularly surprised,” said Fraser. “We are two, three days after the election with a major shift in the results there. And we all know there is a confluence of factors here between the war and some of the AI concerns.”
Fraser pointed out that the market was “priced to perfection,” but noted that selling was largely due to hedge funds rethinking their risk exposure, rather than to mutual funds or retail investors.
“If you take a step back, what are we seeing underneath all of this? It’s really action taken by the hedge funds to de-risk. We’re seeing them buying back short positions, and we’re seeing them sell long positions.”
Why Citigroup CEO thinks a drop would be shallow
Concerns largely stem from the worry that companies are spending too much on AI capacity and increasingly borrowing to finance it. The bear argument is that if IT budgets tap the brakes on AI use due to costs, it could leave the industry with too little demand to repay debt and lead to write-downs on unused infrastructure.
Hedge funds tend to react more quickly to potential risks and rewards than other asset managers and retail investors because they often run leveraged, exposing them to greater gains and losses.
Fraser doesn’t necessarily view their activity as a signal that the AI trade is over.
“[AI] is a transformative technology and capability. The demand behind AI is real,” said Fraser. “The genie is not getting put back into the bottle. This is real demand behind compute. And that’s not going to be changing over the next few years.”
What could happen to S&P 500 next?
Fraser isn’t alone in thinking that market weakness could be healthy and set up a potential rally through 2027. I recently wrote that Morgan Stanley’s Mike Wilson believes we could see a retest of last week’s low and potentially a move down to 7100-7300 on the S&P 500, creating a buy opportunity.
Certainly, many stocks have already been hit hard, as evidenced by the five stocks I pointed out last week that were already down over 50% from their summer highs, including SanDisk.
Bargain hunters bid up stocks after last Thursday’s drop, myself included, and some of those buyers were busy again on Monday. However, a hotter-than-expected Consumer Price Index inflation report for October has increased the likelihood that the Federal Reserve will raise interest rates further, creating an economic headwind for demand.
CPI inflation beat expectations for a third consecutive month with headline & core rising by 0.4% m/m & 0.3% respectively,” wrote Bank of America in a research note shared with TheStreet. “The data all but lock in a December hike and, following Gov. Waller’s hawkish comments this morning, open the door to a 50bp move.”
Add that to the real struggle households are facing as wages fail to keep pace with prices, and you have a recipe for volatility that whipsaws investors who react emotionally.
All that said, history favors the S&P 500 heading higher in 2027. I previously wrote how CFRA Sam Stovall, a 40-year market veteran, pointed out that a fifth year of gains is pretty common following four consecutive years of upside.
“The average gain in the fifth year of bull markets since WWII was nearly 21%. Only one of the bulls that lasted four years did not survive until its fifth anniversary,” wrote Stovall in October.
That optimism certainly aligns with the four-year Presidential cycle. Midterm election years are notoriously weak, as investors worry about how policies may shift depending on which party wins office. Those worries tend to fade relatively quickly, though, and the third year of the cycle is the friendliest for gains, historically, returning 16.1% since 1953, according to the Stock Trader’s Almanac.
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