Citi Unveils Fed Rate Cut Strategy for U.S. Equities

Citi has released a playbook anticipating a Fed rate cut cycle, projecting a “Goldilocks” scenario of moderate inflation, low unemployment, and steady growth. This scenario is expected to boost stocks and risk assets through 2025.

Scott Chronert, U.S. Equity Strategist at Citi, has been pivotal in crafting this outlook. He emphasizes a barbell strategy between growth and cyclicals, aimed at leveraging small- and mid-cap equities’ earnings recovery by 2026.

The market anticipates increased flows into U.S. equities and risk assets. Lower interest rates are likely to support high-yield bonds, BTC, ETH, and high-beta crypto assets which are seeing boosted demand.

Citi forecasts five to six 25 basis point Fed rate cuts. These cuts could lower the federal funds rate to 3.5%, potentially increasing U.S. dollar liquidity and benefiting risk assets and equities alike.

Historically, rate cuts paired with strong U.S. equities result in market rallies. Similar cyclical rate cuts suggest high-beta stocks and risk-on alternatives, including BTC and ETH, might outperform.

The impact on cryptocurrencies like BTC and ETH links to lower real yields and increased speculative inflows. Historically, dovish monetary policies support higher volatility tokens and equity volatility is expected to rise. “As we go further down this Fed rate path, look ahead to the Q3 earnings setup, and then think about how we’re going to get into the end zone… In this soft landing Goldilocks scenario, that’s where you can begin to go down into small- and mid-cap on the premise that you’re going to get more of an earnings recovery into 2026 as we get a little bit more Fed stimulus relative to the past two years of let’s call it earnings recession,” Scott Chronert shared.