(Bloomberg) -- As recession worries take hold, US stocks are once more in favor with Citigroup Inc. strategists while Europe is losing its appeal.

A team led by Beata Manthey upgraded US stocks to overweight from underweight on Friday as they “perform more defensively than other markets” during earnings recessions. They expect global earnings-per-share to contract 5% in 2023 and say that analysts are likely to slash profit estimates even further. 

Meanwhile, the strategists cut European stocks ex-UK to neutral after several months of outperformance due to their cyclical nature, and as they lag behind the US leading up to and during earnings recessions, they said.

Citigroup strategists raised European stocks to overweight at the start of this year due to enticing valuations while cutting the US to underweight as earnings expectations seemed too optimistic. Earlier in March, Manthey said European stocks could rally further, but potential gains were derailed after the collapse of several US regional lenders and crisis engulfed Credit Suisse. Manthey is now more cautious on Europe after the banking-sector stress served as a reminder of the risks from monetary tightening.

“We think investors’ attention will increasingly shift from risks of higher rates to risks of recession,” she wrote on Friday. “This should catalyze a change in market leadership, with defensives and high-quality sectors/regions continuing to outperform.”

In terms of sectors, the Citigroup raised global technology stocks to overweight while downgrading global financials to neutral due to lingering banking-sector concerns and tightening credit conditions. The rotation from banks to tech is already taking place, with the Nasdaq 100 entering a bull market while lenders are set for the worst month since March 2020 in Europe and the US.

The Citigroup team expects the MSCI All Country World Index to be range-bound this year, though they foresee volatility in the near term as the market prices in the impact of a US recession in the second half of this year. The strategists would buy dips “but wouldn’t chase the rallies.”

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