After volatile year, Citi analyst sees risks of investor exhaustion

Despite a solid rally on Monday, stocks are still on track to end November in the red — the first monthly loss for the S&P 500 since April.

And Citi US Equity Strategist Scott Chronert thinks investors may try to close the books on 2025 early and book gains, rather than hope to ride the seasonal upswing in stocks that sometimes appears late in the year — the vaunted Santa Claus rally.

“We’ve had to navigate so much this year in the equity markets, beginning with DeepSeek, tariffs, and other Trump administration policy issues, OBBA,” Chronert said in a telephone interview Monday. “I think we might just have a very exhausted investor base that’s happy to lock things in for the year.”

In a note he published on Monday, titled “Exhaustion,” he spelled out the thinking behind his call for the markets to largely chop sideways into year-end, bringing the S&P 500 in for a landing at around his target of 6,600 for the year. (It’s currently hovering around 6,700 shortly after 1:30 p.m. ET.)

Supporting evidence for such a view, he says, can be found in part in the market’s reaction in recent weeks to strong earnings results from giant tech companies like Nvidia, or to a lesser extent, Palantir Technologies.

Both saw share prices drop despite objectively excellent numbers.

That divergence between financial results and market reaction could be a sign of growing caution from investors about the large-cap, tech-based AI trade that has supercharged stock returns over the last two years and generated the best two-year gains since the dot-com boom.

“I think the days of the Mag 7 as a thing are behind us,” Chronert said, citing the dispersion of returns for the group this year.

(Meta, Amazon, and Tesla have relatively modest gains. Alphabet and Nvidia have killed it. Microsoft and Apple are somewhere in the middle.)

“The Mag 7 is acting much differently and idiosyncratically this year,” Chronert said. “I think as we go down this AI path, the market’s telling us that everybody isn’t going to be a winner. It’s going to be more differentiated.”

If there is an upside risk for the market that could generate a year-end rally, Chronert says, it’ll likely be tied in some part to the Federal Reserve’s December meeting.

Expectations for rate cuts at the US central bank’s final meeting for the year have fluctuated pretty wildly over the last month, amid growing uncertainty over the outlook for the job market and inflation tied to the statistical blackout during the US government shutdown.

“There’s an opportunity for a strong finish, but it probably comes with another Fed rate cut,” he said. “I’m pretty comfortable, and it’s not a bad thing, if we trade sideways into the end of the year and then reengage next year.”