Citi Wealth has doubled down on US large-cap equities, short-duration bonds and gold for the second quarter, arguing the Middle East war has tightened financial conditions, lifted inflation risks and strengthened the case for quality assets over Europe, longer-duration debt and lower-grade credit.
In its 2026 Q2 Macro Investment View, the firm said markets had been forced to absorb multiple shocks in the first quarter, including energy disruption, geopolitical stress and shifting policy expectations, which increased volatility and led investors to reprice risk more abruptly across asset classes.
Although Citi said the US economy continued to show resilience through stable labour markets and healthy consumer activity, it warned the new backdrop had materially reduced the scope for further multiple expansion and increased the need for resilient portfolio construction.
“Policy expectations have shifted sharply toward tighter financial conditions as inflation risks remain elevated, and energy prices move higher. That backdrop reinforces our preference for portfolio resilience, quality, and short-duration exposure.”
Citi said it had already made two key portfolio changes since the start of the year to reflect the new environment.
Following the spike in bond yields after tensions escalated in the Middle East, it trimmed exposure to emerging market debt and added to US short-duration debt.
In equities, it reduced European exposure in favour of US large caps, saying Europe’s weakening macro backdrop and persistent energy-related headwinds left the region’s risk assets less compelling.
Those moves underpin what Citi described as its five highest-conviction calls for 2Q26: staying anchored to fundamentals through US equities, remaining underweight duration, preferring equity risk to credit risk, maintaining gold as a strategic allocation, and leaning into longer-term structural themes linked to supply-chain realignment, energy security and fiscal spending.
Citi said US equities remained its preferred core exposure because earnings growth and revision momentum continued to outpace other developed markets.
According to the report, year-to-date next-12-month earnings-per-share revisions stood at 7.0 per cent for the S&P 500, compared with 1.5 per cent for the Russell 2000 and 1.6 per cent for Europe, while US large caps also offered stronger margins, balance sheets and cash flow generation.
“Therefore, we maintain our preference for adding risk exposure in U.S. large cap equities given their high quality and durable earnings profile,” the firm stated.
Citi also reiterated its underweight position on US small caps, warning a meaningful share of the segment relied on front-end financing and floating-rate debt, leaving it more exposed to higher short-term interest rates and tighter credit conditions.
Until there is clearer relief on the cost of capital or a more sustained reacceleration in domestic growth, the firm said higher-quality segments of the equity market continued to offer better relative value.
Europe, by contrast, was singled out as the region most exposed to the energy shock, with Citi arguing attacks on Persian Gulf infrastructure had sharply lifted oil and gas import costs for an already energy-dependent market.
It said the surge was feeding directly into inflation, industrial input costs and margin pressure, while markets increasingly leaned towards rate hikes rather than cuts, tightening financial conditions into an already fragile growth backdrop.
“In sum, we believe Europe’s direct exposure to an energy-driven margin squeeze alongside tightening policy, versus the U.S.’s stronger economic and fundamental position, presents an opportunity for a relative rotation toward U.S. equity exposure in the current environment.”
Citi said it remained selective in emerging markets, preferring to keep risk exposure in equities rather than debt.
The firm said it was constructive on markets such as South Korea and Taiwan given their role in the AI buildout, but it had rotated out of emerging market debt into front-end US Treasuries on 19 March as spreads looked vulnerable to further widening under the conflict-driven growth shock.
Higher yields had improved the case for fixed income income, Citi said, but not enough to justify taking on excessive duration or credit risk.
The report said high-quality US bond indices remained near the upper end of their 15-year yield percentiles, making shorter-duration, higher-quality bonds more attractive for income and capital preservation, while longer-duration debt still faced directional pressure from higher energy prices and worsening fiscal deficits.
“On balance, this evaluation leads us to stay underweight duration and up-in-quality within our bond allocation – allowing for the bulk of our risk taking to remain in growth-oriented equities.”
Citi said it would consider adding duration only once the US 10-year Treasury yield moved above 4.5 per cent, where bonds could begin to offer more attractive income and more effective hedging during an equity drawdown.
Until then, the firm said the persistence of positive equity-bond correlations limited the portfolio ballast offered by longer-dated government bonds.
Citi continued to position gold as a core portfolio diversifier, preferring bullion over long-duration bonds as a hedge and noting it had outperformed global equities by 25 per cent and global bonds by 36 per cent over the past year, despite a recent drawdown.
It said the longer-term case remained intact as global investors, sovereigns and central banks increased gold’s share of reserves as protection against a more fragmented and multi-polar world.
“While longer-end duration remains directionally challenging with limited portfolio ballast, we maintain our preference for gold as a substitute for long-duration bonds.”
