The firm said there are potential opportunities in US small capitalisations, global markets and – for “suitable investors” – in alternatives.
Citi Wealth argued that alternative asset classes, which have increased their assets under management across six categories to over US$18 trillion between 2000 and 2023, could gain further popularity among qualified investors seeking returns and portfolio diversification.
However, it cautioned: “Nevertheless, we observe that many suitable and qualified investors still do not follow their long-term investment plan when it comes to alternatives, allocating either too little or not at all.”
Citi Wealth also reiterated its positive multi-year outlook for private asset classes.
“For suitable and qualified investors, we see potential for diversification and returns from private markets. Not without risks, evergreen funds are broadening access to private equity, private credit and real estate,” the firm said in its Investment Strategy Bulletin.
It favours the likes of secondary private equity strategies, private credit and industrial and hospitality real estate. Risks include leverage, less transparency and operational issues.
According to the firm’s weekly update, the analysis of the performance of the S&P 500 suggests that high returns for the S&P 500 in the past two years were “a rare event”, and are unlikely to be repeated, despite some parallels to the 1990s boom.
Moreover, the firm cautioned that the long-term approach to portfolio construction should not assume a repeat of the S&P 500’s performance over the last decade, as the last 10 years of 13 per cent returns for large-cap US equities would be difficult to achieve again.
“We began by noting that back-to-back broad US market annual gains of more than 20 per cent are rare. This does not preclude further gains in any way if EPS growth is sustained — our base case expectation,” the firm said in its update.
“We would not manage portfolios toward expectations of a late 1990s repeat. That period came with risks that harmed returns for the decade that followed.”
While Citi Wealth fundamentally agrees with “AI profit optimists”, it cautioned that this optimism had already generated a strong return at the expense of future returns.
“While we don’t, in any way, exclude large-cap US tech investments, if one wants to seek returns where expectations are low, they need to turn elsewhere for potential opportunity,” the firm said.
Discussing some similarities between the past few years and the last tech boom, the firm observed that good fundamentals and new technology – the internet in the 1990s and AI in the 2020s – boost investor confidence in the strength of future profits, meaning a higher value is paid for a stake in tomorrow’s economy.
“With our own expectation for US EPS gains below 10 per cent in 2025 and 2026, we would not make the case for returns mapping a repeat performance of the 1990s boom,” it said.
Separately, Citi Wealth noted that the highly unusual joint decline in US equities and government bonds in 2022 helped fuel two exceptional years of strong returns in 2023 and 2024.
“The 20 per cent threshold may be arbitrary. But there were only four periods of back-to-back gains in excess of 20 per cent for the S&P 500 or its predecessor index in the past century,” it said.
“The two such periods prior to World War II included the ‘roaring 20s’ boom that preceded the depressionary 1930s bust.”
The firm emphasised that although the US equity returns peaked at 29 per cent in 2024, December saw a 2.4 per cent loss for the S&P 500, with poor market liquidity, holiday season investor retreat and a lack of new positive catalysts contributing to a decline.
“Nonetheless, equities remain in an uptrend as the world economy expands,” the firm said.
“While US trade policy poses particular risks, we expect corporate profits to expand more broadly this year, including greater global participation, and especially for smaller US firms.”
Barring unexpected shocks in 2025, broader gains are anticipated in the coming year.
“With no signs of an overheating boom outside of perhaps very narrow areas of tech, our outlook is for sustained expansion into 2026. This will be more critical to driving returns as the coming year transpires,” it said.
