MW Don't swing for the fences even as the stock market scales worries, says Citi. Here's its barbell portfolio.

By Jamie Chisholm

Investors should take a more prudent approach during a volatile first half

It's been a volatile few weeks for markets. But after two sell-offs caused by DeepSeek's challenge to the AI orthodoxy, and President Trump's tariff shenanigans, the S&P 500 SPX nevertheless sits less than 1% shy of the record closing high hit on Jan. 23.

Bulls will be emboldened by the Teflon market, where initially negative headlines don't stick.

But Drew Petit, U.S. equity strategist at Citi, believes the current uncertain environment still requires a cautious approach. "To summarize, we borrow a baseball analogy. Now is not the time to swing for the fences," he says.

Petit lists the hurdles the market has had to overcome in recent weeks. Along with tariffs and the calling into question of the AI build out mentioned above, there was also at the start of January sharply rising bond yields - though the latter have been pared of late.

"Risks have been popping up around every corner, challenging various parts of the market at different times," says Petit. "What's needed now is risk management, not avoidance."

So, what does this mean? In essence a "barbell approach" is required using growth stocks alongside cyclicals and defensives, though "the key is managing important risks within each cohort," he says.

That's because each of those investing factors face challenges. The high valuations of many growth stocks puts greater pressure on fundamentals and guidance. For cyclicals "a broader early cycle regime is lacking so we bias towards visible inflections," says Petit.

Meanwhile, defensives face "rate risks and inflation stickiness [that] keeps us focused on high quality, less rate sensitive exposures."

To capture the strategy Citi has produced what it calls the Thematic 30 Recommended list, which it accepts does have a significant mega-cap growth exposure, though each stock has a 3.3% weighting in the portfolio.

Petit notes that the Thematic 30 has managed volatility well to start 2025 and now leads the Russell 1000 RUI benchmark by more than 300 basis points.

"Investors should address acute risks within each of the growth, cyclicals, and defensives cohorts, but ultimately have exposure to each, especially as equity markets broaden. Eventually, a clearer and more lasting rotation may become evident," Petit concludes.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is up, while oil prices (CL.1) gain and gold (GC00) is trading around $2,860 an ounce.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6061.48    0.37%   2.42%   3.06%   21.35% 
   Nasdaq Composite                                                     19,692.33  0.31%   1.10%   1.98%   24.98% 
   10-year Treasury                                                     4.441      -7.80   -24.70  -13.50  28.42 
   Gold                                                                 2882.8     1.09%   7.06%   9.23%   40.64% 
   Oil                                                                  71.63      -2.21%  -3.58%  -0.33%  -6.32% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

U.S. economic data due on Thursday include weekly initial jobless claims alongside fourth-quarter productivity at 8:30 a.m. Eastern.

Companies reporting earnings on Thursday include Eli Lilly $(LLY)$, ConocoPhillips $(COP)$, Peloton Interactive $(PTON)$ and Roblox $(RBLX)$ before the opening bell, with Amazon.com $(AMZN)$ the highlight after the close.

Ford Motor $(F)$ and Qualcomm $(QCOM)$ shares are both down around 5% after delivering poorly-received guidance.

Shares of Skyworks Solutions $(SWKS)$ are diving 23% after the Apple $(AAPL)$ supplier said tougher competition for the iPhone maker's semiconductor business would cut into sales this year.

Honeywell International $(HON)$ says it's breaking into three as it also offered sales guidance below expectations.

Fed Governor Christopher Waller speaks at 2:30 p.m. and Dallas Fed President Lorie Logan speaks at 5:10 p.m.

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Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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   AAPL    Apple 
   BBAI    BigBear.ai 
   TSM     Taiwan Semiconductor Manufacturing 
   AMZN    Amazon.com 
   MSTR    Strategy 

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February 06, 2025 06:34 ET (11:34 GMT)

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