Citi strategists warn of potential near-term consolidation in global equities following a volatile week marked by sharp single-stock swings and rapid factor rotations. The recent turbulence was driven by concerns over AI-related sectors and unusual post-earnings price action, with stocks punished more heavily for misses than usual. European markets showed mixed performance beneath the surface, with a roughly 20 percentage point gap between the best and worst-performing industries.

Despite the volatility, the current reporting season has been relatively average, with about 56% of companies beating consensus forecasts and aggregate earnings coming in approximately 4% above expectations. However, Citi strategists led by David Groman note that even stocks delivering positive surprises have underperformed after results, likely reflecting a challenging valuation backdrop. European equities are already pricing in earnings upgrades to year-end, adding pressure to the market.

The selloff in software and other "AI-disrupted" sectors has led to a notable repricing of global IT, which Citi now identifies as the cheapest among global sectors while still projected to deliver around 40% EPS growth in 2026. This repricing has coincided with a rotation into traditional Value sectors such as Energy and Basic Resources. Citi's analysis suggests that when dispersion far outpaces index volatility, equities tend to be flat over the following one to three months, though higher six months later. The bank maintains a constructive outlook on equities into year-end, with an Overweight stance on Emerging Markets and Japan.