With Trump's tariffs about to take effect, will US growth stocks become a safe haven?

As the tariff shockwave on "April 2" approaches, Citigroup advises investors to focus on growth stocks.

In a research report released on March 28, Citigroup stated that the investment barometer for the second quarter of 2025 is shifting from balanced to "growth-oriented." In the face of macroeconomic "trough" risks and uncertainties surrounding the Trump administration's tariff policies, Citigroup believes that "growth is defense."

The report further pointed out that attention should be paid to growth sectors that are under pressure in Q1 valuations but have solid fundamentals, while being cautious of the potential impacts of tariffs, especially in cyclical and defensive sectors.

Among the growth sectors, the report upgraded the ratings of information technology (semiconductors and semiconductor equipment, software and services), communication services (media and entertainment), and healthcare (pharmaceuticals, biotechnology, and life sciences) to overweight.

Growth stocks significantly corrected in Q1, with Trump’s tariff clouds expected to linger

Looking back at Q1, the market experienced significant volatility. Citigroup noted that, as expected, the noise from the Trump administration's related policies led to cautious comments from management during the Q4 earnings season, resulting in a $5 increase in the full-year earnings forecast for 2024, but a simultaneous $3 decrease in the forecast for 2025.

More notably, large growth stocks corrected, with declines exceeding the 10% pullback of the index from the low point between February 19 and March 13.

Entering Q2, the Trump administration's tariff policies have become the market focus. Citigroup expects that the related fundamental uncertainties will persist, and management's guidance on tariffs may lead to a downward revision of the full-year earnings forecast for 2025.

It remains unclear whether this will trigger a "half-full" or "half-empty" reaction from investors—gaining clearer (albeit imperfect) impact information could be a "clearing event," but it may also lead to ongoing uncertainty, further undermining investor confidence.

Citigroup also emphasized that the impact of tariffs is a "hot topic" in the current market, stating that tariffs could have a "game-changing" effect on its full-year fundamental expectations.

One dynamic to watch in the coming weeks is whether individual stocks are overpricing or underpricing tariff risks. Comments from management during the upcoming Q1 earnings season will be crucial, potentially providing some clarity to the market but may also exacerbate uncertainty.

Core Strategy Shift: Embrace "Defensive Growth"

The report clearly states that its Q2 strategy will abandon the balanced cluster approach advocated in Q1, shifting towards a more "growth"-oriented industry group and sector allocation In short, against the backdrop of economic "trough" risks emerging and macro concerns evolving, the logic of "growth as defense" is once again emphasized.

It is noteworthy that the price movements in Q1 led several growth industry groups (IGs) to experience extraordinary valuation compression, but their fundamentals largely remained unchanged. Citigroup believes that this valuation correction, combined with still visible structural growth momentum, may help address the changing macro/consumer concerns.

Based on the logic of "growth as defense," Citigroup made significant adjustments to the technology sector. It upgraded the rating of Software & Services to overweight, alongside maintaining an overweight rating for Semiconductors & Semi Equipment. This adjustment directly raised the overall rating of the Information Technology sector to overweight.

The report also maintains an underweight on Technology Hardware & Equipment, reflecting a cautious attitude towards it, especially considering potential tariff risks and relatively high valuations. This will have a direct impact on the components of the technology "seven sisters."

Cyclical Stocks: Banks Still Favored, Energy Cools Down

In the cyclical sector, Citigroup continues to be optimistic about Banks, maintaining an overweight rating, believing that their fundamentals remain solid, valuations are not overly stretched, and implied growth expectations provide ample margin of safety.

However, Citigroup downgraded its reverse overweight in the Energy sector to market weight. Citigroup admitted that it did not anticipate Energy would become the best-performing sector year-to-date, and expressed insufficient confidence in whether its relative return momentum could continue under unfavorable commodity price expectations.

Additionally, Citigroup continues to maintain underweight ratings on Consumer Discretionary, Industrials, and Materials, primarily based on expectations that these areas will continue to be disrupted by tariffs.

The Automotive & Components sector also remains underweight, with the report stating that due to pressure on Tesla this quarter, it chose to take profits.

Defensive Strategy Adjustment: Healthcare Leads, Telecom and Consumer Staples Fade

In defensive allocation, Healthcare remains Citigroup's top choice, primarily driven by Pharmaceuticals, Biotechnology & Life Sciences, which maintains an overweight rating.

Citigroup believes that Healthcare is not completely immune to tariff impacts, but Consumer Staples may face greater negative risks, thus maintaining an underweight rating on Consumer Staples and downgrading Food, Beverage & Tobacco to underweight Telecommunication Services was downgraded to market weight after a strong performance in the first quarter. Citigroup chose to take profits due to declining earnings expectations, rising short interest, and being in an overbought state.

Real Estate Investment Trusts (REITs) and Utilities maintain market weight, as they can provide some ballast if economic trends point to further weakness and more Federal Reserve easing policies.

Risk Warning and Disclaimer

The market has risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk