Citi says a correction on Wall Street 'very likely'

A so-called 'correction' on Wall Street is increasingly likely now that the risk-reward offered by shares has turned 'neutral', Citigroup said.

In a research note sent to clients, Citi's US equity strategist, Tobias Levkovich, said: "Our current caution reflects several factors, including ebullient sentiment readings, stretched valuation levels and slipping earnings revision momentum

"With limited upside even to others’ bullish targets, a neutral stance is realistic."

The accepted definition of a correction in stocks is a drop in equity prices of as much as 10% while the yardstick for the start of 'bear market' or potential change in the trend is a decline of greater than 20%.

Implicit in that definition also is that the door remains open to the possibility of renewed gains - or not - further down the road.

Citi's year-end target for the S&P 500 in 2021 was 3,800 with Levkovich and his team predicting that it would trade roughly sideways from here on out, in a range between 3,600 and 4,000 points.

The day before the equity benchmark had finished at 3,933, leaving it within a whisker of its all-time highs of 3,950.43.

Stocks in the US were not in a bubble and comparisons with the technology bubble of 2000 didn't hold water, Levkovich reportedly added.

To back up his claim, the strategist pointed out that the American economy was exiting and entering a recession and that the Federal Reserve remained on the sidelines.

That, he said, suggested that a deep selloff in equities was unlikely.

"While they can back off 10%-20%, we do not envision a 50%-plus collapse."