Citi Projects Global Stock Rally to Continue Through Mid-2027 Despite Rate Hike Headwinds

Strategists at Citi are maintaining their call for continued, earnings-driven gains in global equities through mid-2027, even as central banks around the world, including the U.S. Federal Reserve, pivot toward tighter monetary policy.

Global Tightening Cycle Underway

The bullish equity outlook persists despite expectations from Citi's own economists that the Federal Reserve will raise interest rates this week, marking the first hike since it began an easing cycle nearly two years ago. The bank notes this is part of a broader global shift, with its economists also forecasting hikes from the Bank of Japan, the European Central Bank, and the Bank of England.

According to the report, the number of global central banks raising rates now surpasses those that are cutting for the first time in years. However, strategists led by David Groman wrote that resilient global growth should provide a supportive backdrop for corporate earnings and, by extension, stock prices.

Historical Performance During Fed Hikes

Citi's analysis of Fed hiking cycles dating back to the 1970s suggests that while markets often experience initial volatility, equities tend to recover. The strategists noted that "it is not the first Fed hike that ends equity bull markets."

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Key findings from the historical data include:

• In the three months following the first rate increase, stocks rose in only about one-third of the cycles analyzed.
• Twelve months after the first hike, however, equities were higher in the majority of cases, delivering an average gain of approximately 7%.

Expected Market Rotations and Risks

The report also anticipates significant market rotations following the start of a tightening cycle. Historically, U.S. markets have tended to underperform, while developed markets outside the U.S., particularly Japan and Europe, have outperformed by an average of 5-10% one year after the first hike.

Furthermore, the analysis suggests a shift in factor leadership, with Value sectors typically outperforming Growth and Cyclicals outpacing Defensives. While acknowledging that rising bond yields present a challenge, Citi maintains that equities can perform well if economic growth remains strong. The bank did, however, cite "rising stagflationary risks (via geopolitics) and growing market exuberance" as potential headwinds.