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Market is 'evolving' towards consumer discretionary: Strategist

In the first quarter of 2024, many of the AI-led tech companies performed well, with some of the Magnificent Seven experiencing a fall from grace. With some uncertainty moving ahead, and a potential pullback from historic highs, Citi has downgraded the tech sector from Overweight to Market Weight, citing a broadening out of market gains, while upgrading the consumer discretionary sector to Overweight.

Citi US Equity Strategist Scott Chronert joins Yahoo Finance to break down the calls for these sectors and take a look into how the market may perform moving forward.

Chronert elaborates on his position: "The market's evolving, the market's evolving away from the tech and cyclical leadership that we've had since early November. We think we're starting to see signs that the market is gradually positioning in favor of those parts of the market that should at the margin benefit from an eventual Fed [Federal Reserve] pivot, consumer [discretionary] is front and center on that. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

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Editor's note: This article was written by Nicholas Jacobino

Video transcript

JARED BLIKRE: Tesla shares sinking this morning after missing Street estimates for its first quarter delivery. The stock has been punished so far this year down over 30%. Tesla along with Apple have lagged the broader market so far this year. Meanwhile, the S&P 500 has notched several new record highs.

As tech begins to lose some of its luster, what sectors can investors look to for growth? Now, Citi may just point you toward consumer discretionary. The firm downgraded the tech sector to market weight from overweight while boosting its rating on the consumer discretionary sector to overweight.

Joining us now is one of the analysts behind the call, Scott Chronert, Citi US equity strategist. And Scott, thank you for joining us here today.

SCOTT CHRONERT: Sure.

JARED BLIKRE: This is a call on consumer discretionary. You are excited about the auto industry, the automotive industry. Just explain your call for us.

SCOTT CHRONERT: Well, let's put it this way, we've been underweight in the autos for the better part of the last quarter. And we decided to lift it from an underweight to a market weight. What that did mechanically was play into other areas of the consumer, particularly retail, durables where we have already been constructive, and we've even lifted our consumer services bias a bit more favorably as well. So all told, what that does is take our consumer discretionary view to a much more constructive one.

But you know, it's really quite interesting because it's a related topic du jour is that part of where we're going with our sector calls is the market's evolving. Market's evolving away from the tech and cyclical leadership that we've had since early November. We think we're starting to see signs that the market is gradually positioning in favor of those parts of the market that should, at the margin, benefit from an eventual Fed pivot. Consumers front and center on that.

MADISON MILLS: Well, talk to me then about what that potential Fed pivot could be doing to equities. We're seeing a lot of red on the screen this week because of some hotter than anticipated data, particularly with the ISM on Monday. Has that changed your view on the ability of equities to withstand a higher for longer environment?

SCOTT CHRONERT: You know, it hasn't from a structural perspective. I just think what we have to keep perspective on is that this move, this aggressive S&P move since early November really has been predicated on soft landing expectations and almost a Goldilocks persona to what's been going on regarding the economy and the Fed. So when you get incremental data points that question the timing of that first Fed rate cut and we're still in print thinking it's, sort of, a June time frame, that's going to distort and bring into question that Goldilocks soft landing, which is, in our view, a reason for the market to, let's call it, digest some of the gains that we've had. So it all, sort of, fits that way, Madison. But what I would say is that we still think on balance, the way the data is unfolding here is that the Fed, we think, is going to have a decent underpinning to gradually, gradually lessen its degree of restrictiveness.