(Bloomberg) -- With the global economy likely to slow down next year, tech stocks and US equities are looking more attractive, according to Citigroup Inc. strategists. 

Strategists led by Robert Buckland expect 18% returns for global stocks by the end of 2023 but warn “it will likely be a volatile ride.” Growth strategies will be back in play as investor focus shifts from higher rates headwinds to earnings resilience.

“We suspect investor attention will increasingly switch to EPS risks,” the strategists wrote in a note on Thursday. “We tilt our recommendations towards those markets and sectors where EPS should hold up better in a global slowdown,” they said, lifting global tech stocks to overweight. 

Global technology shares have been hit hard this year, with multiple central bank rate hikes across the globe taking a toll on elevated valuations. The MSCI World Information Technology Index has lost nearly 30% of its value in 2022, while the US benchmark Nasdaq 100 Index is down 29%.

Globally, Buckland and his team see analyst profit forecasts as “too high,” with bottom-up consensus at 10% EPS growth for the MSCI AC World in 2022, followed by 6% in 2023. They expect a 5% earnings contraction for 2023, consistent with below-trend global GDP growth and above-trend inflation. However, they note that should be much milder than the average EPS downturn in the last three big global profit recessions, which was 31%.

Investors should continue to favor defensive equities over cyclical peers, but keep their focus on sectors with resilient earnings, the strategists said. They expect health care and technology will hold up “reasonably well in a recession,” while the only traditional cyclical sector they like is financials, as they should benefit from higher rates and credit risks are lower than in previous downturns.

Country-wise, the strategists’ preference goes to US and UK stocks. They see the US as “more defensive than other markets in a global EPS contraction,” while the strong currency will continue to boost relative performance. As for the UK, it’s their favorite “value trade,” given cheap valuations and high overseas exposure.


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