For wealth advisors and RIAs navigating an environment of record-breaking equity prices, Citi’s latest market research offers a clear message: the time to sell hasn’t arrived yet.
Despite mounting concern that U.S. stocks are deep in bubble territory, Citi’s global market strategy team—led by Adam Pickett—argues that investors should resist the urge to step to the sidelines. According to the firm, even if valuations look stretched, markets tend to continue performing well after entering bubble phases. The prudent move, therefore, is to stay invested until concrete signals suggest the bubble is about to burst.
“By our definition, U.S. equities are in a bubble,” Citi strategists wrote in a client note. “But historically, markets deliver strong forward returns after entering a bubble, and bearish positioning only pays off once you exit bubble territory.”
Stay in the Market—For Now
The S&P 500’s relentless climb this year has triggered increasing anxiety among investors who see valuations detached from fundamentals. The index is up roughly 35% from its April lows, pushing traditional metrics such as the Case-Shiller P/E ratio and the Buffett Indicator to levels associated with past market tops.
Yet, Citi maintains that the current environment doesn’t resemble the late stages of a speculative blow-off. Instead, the firm argues the rally could have room to run, supported by both historical precedent and macro policy trends.
Three key points underpin Citi’s bullish stance:
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This bubble looks young.
Citi compared the current environment to eight prior market bubbles dating back to 1929. Their analysis found that bubbles typically unfold in distinct stages—early expansion, acceleration, and eventual euphoria. By that framework, today’s market appears to be in the early phase, suggesting further upside is likely before exhaustion sets in. -
Fed policy is supportive, not restrictive.
Unlike previous bubble periods when the Federal Reserve was tightening, this time the central bank has pivoted to easing. The Fed has already begun cutting rates—a rare move during periods of excessive market optimism. “The Fed will likely be cutting into a bubble when they hiked into every previous one,” the strategists wrote. “That alone argues for staying long.” -
More rate cuts may be coming.
While markets currently expect around 75 basis points of rate reductions over the next six months, Citi projects a full 100 basis points of cuts over the same period. That additional policy tailwind could further lift valuations and extend the bull run.
“In short, don’t fade a bubble—sell a bursting bubble,” the strategists concluded.
Knowing When to Exit
For advisors guiding client portfolios through this frothy landscape, Citi highlights two indicators that could provide a disciplined framework for deciding when to scale back risk exposure.
1. The POLLS Indicator
The first is Citi’s proprietary POLLS index—a composite measure that tracks positioning, optimism, liquidity, leverage, and systemic stress. The indicator serves as an early-warning system for overheating market conditions.
Historically, the firm found that investors who trimmed exposure when the POLLS reading climbed above 18 saw better risk-adjusted returns. The current level stands at 13, implying the bubble remains intact but not dangerously inflated.
“Cutting out of the market when POLLS exceeds 18 improved returns,” Citi wrote. “We are not there yet.”
2. The “When the Generals Fail” Indicator
The second signal focuses on market leadership. Citi’s “When the Generals Fail” indicator tracks the performance of the seven largest stocks in the S&P 500—the so-called “generals” of this market cycle. A warning flag appears when three of these seven mega-cap names fall below their 200-day moving average, signaling potential exhaustion in leadership.
For now, that threshold hasn’t been breached. All major large-cap leaders—primarily in tech and AI-related sectors—remain comfortably above their long-term trend lines. “The indicator is not flashing a warning for equities,” Citi said.
Context: Other Firms Also See More Upside
Citi’s cautious optimism contrasts with a growing chorus of bears warning that equity markets are in unsustainable territory. High valuations, narrowing breadth, and speculative retail activity have prompted comparisons to 1999. Yet, among major Wall Street houses, the consensus view remains that stocks can push higher before the next major correction.
Bank of America recently raised its 12-month price target for the S&P 500 to 7,200, citing continued economic resilience, improving liquidity, and a shift in investor positioning toward growth. Goldman Sachs has a similarly bullish outlook, with a target of 6,900 over the next year, supported by productivity gains tied to artificial intelligence investment and a soft-landing economic scenario.
Even some traditionally cautious firms have toned down their bearishness. UBS recently noted that although valuations are elevated, the lack of speculative leverage—especially in credit markets—makes the risk of an imminent crash lower than in past cycles.
Implications for Advisors
For wealth advisors and RIAs, Citi’s analysis offers a tactical blueprint for managing client exposure amid an overheated but still advancing market. The key, the strategists suggest, is discipline, not fear. Advisors can remain allocated to equities while maintaining a clear framework for when to de-risk.
That approach may help advisors address clients’ growing unease about valuations and potential drawdowns. By referencing data-driven thresholds such as the POLLS indicator and leadership breakdowns, advisors can anchor discussions around measurable market signals instead of emotion-driven decisions.
Portfolio Implications:
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Maintain equity exposure, particularly in quality large caps and sectors benefiting from monetary easing, until early warning indicators begin to flash.
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Watch liquidity and leverage trends closely. A tightening in liquidity or rising margin debt could signal that the bubble is maturing.
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Use tactical hedges rather than wholesale selling. Options overlays, structured notes, or rotating into lower-volatility strategies may offer protection without sacrificing upside.
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Communicate the bubble timeline. Help clients understand that bubbles often last longer than expected, and exiting too early can mean missing substantial gains.
A Young Bubble Can Still Inflate
Citi’s research also provides a reminder that bubbles, by definition, are not short-lived. They can persist and even accelerate for months—or years—after first appearing overvalued. Historical analogues such as the late 1990s and mid-2000s demonstrate that markets often deliver double-digit returns during the later stages of speculative cycles before sentiment reverses.
That dynamic presents both opportunity and risk for wealth managers. Advisors who remain fully invested may capture the tail end of the rally, but they must also prepare clients for heightened volatility and the potential for a sharp correction once the bubble pops.
From a behavioral standpoint, one of the biggest risks is premature pessimism. Many investors who feared overvaluation in 2017 or 2019 missed significant market gains before the eventual pullbacks. The same psychology could play out again if advisors or clients exit too early based solely on valuation metrics.
The Fed’s Unusual Role
Perhaps the most striking aspect of Citi’s analysis is the Federal Reserve’s unusual positioning in this cycle. In every major equity bubble of the last century—from 1929 to 2000—the Fed tightened policy as markets overheated. This time, it’s easing instead.
That inversion, the strategists argue, could fundamentally alter the bubble’s trajectory. Lower borrowing costs support higher equity valuations and extend speculative phases. Moreover, easing into a bubble reduces the probability of a near-term liquidity shock—the very mechanism that usually ends bubbles abruptly.
Still, Citi acknowledges that this dynamic comes with long-term risks. The longer easy money persists, the more investors may take on leverage or move into riskier assets in search of returns. Advisors should be alert to signs that credit conditions are loosening too much or that speculative behavior—such as excessive options activity or margin debt—begins to spike.
A Framework, Not a Forecast
Citi’s strategists stress that their guidance isn’t a traditional market forecast—it’s a playbook for navigating late-cycle dynamics. The approach centers on data-driven signals rather than subjective predictions.
The takeaway: stay long while the indicators remain benign, but be ready to reduce exposure swiftly once the metrics signal that sentiment and leverage have peaked.
That’s a disciplined framework advisors can translate into client action plans—whether through stop-loss rules, periodic rebalancing, or using macro indicators as triggers for reallocations.
Bottom Line
Citi’s latest note reframes how advisors should think about bubbles—not as a binary “in or out” condition, but as a dynamic environment that rewards tactical patience.
For now, the message is simple: stay invested. The bubble may be inflating, but it hasn’t burst. The Fed’s easing cycle, combined with still-reasonable liquidity conditions, suggests there’s more runway ahead.
However, the strategy only works if advisors know when to act. Watching indicators like POLLS and “When the Generals Fail” could make the difference between capturing the final leg of the rally and getting caught in the downturn that follows.
In the words of Citi’s team: “Don’t fade a bubble—sell a bursting bubble.” For wealth advisors and their clients, that may be the most important rule in the market right now.
