Citigroup warned that growing safety concerns around artificial intelligence could threaten the impact of AI on corporate earnings, prompting the banking giant to take a more cautious stance on U.S. stocks.
A team led by Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, warned in a Sunday note, reported by MarketWatch, to clients that a slowdown in AI model development could “crimp” earnings-per-share (EPS) revisions.
The team also identified the upcoming November midterm elections, rising bond yields, and surging oil prices as potential cross-asset headwinds for stocks. They believe these factors could weaken the equity rally’s key pillar if the EPS story comes under scrutiny.
The Citigroup strategists also highlighted that last week’s 0.8% drop in the S&P 500 was due to stocks falling prey to macro risks without the protection of earnings. They predict a challenging period for equities, with no earnings, a seasonally weak September, and a summer pullback setting a “higher bar to re-engage.”
Kaiser and team said that companies tied to power generation and data centers could be more sensitive to midterm election-related news flow than semiconductor and memory stocks. However, the bank noted that growing AI safety concerns could also weigh on investor enthusiasm, similar to what happened in early February.
They expect the S&P 500 to remain within 2% of its August highs, keeping “investors on the sidelines.” A 3%-5% pullback could attract dip buyers, but “markets would need to test all-time highs to trigger a chase.”
Some of the stocks to watch out for are Microsoft Corp. (NASDAQ:MSFT), Alphabet Inc. (NASDAQ:GOOG) (GOOGL), Meta Platforms Inc. (NASDAQ:META) and Amazon.com Inc. (NASDAQ:AMZN).
AI Safety Sparks Market Fears
The AI industry’s safety direction has been a topic of concern. Entrepreneur and PBD Podcast host Patrick Bet-David had warned of a potential stock market “bloodbath” due to confusion over the AI industry’s safety direction. He expects the White House to intervene with messaging to "ease the overreaction," while warning that "Monday could get very nasty" nonetheless.
On Monday, Big short investor, Michael Burry criticized OpenAI and Anthropic for their calls to slow down AI development, labelling their stance as “self-serving,” and stating that such calls to slow down would benefit incumbent companies and fuel hype for upcoming IPOs.
Trump Opposes AI Slowdown Call
Concerns over AI safety intensified over the weekend after Anthropic CEO Dario Amodei called for a slowdown in AI development. OpenAI CEO Sam Altman and Space Exploration Technologies Corp. (NASDAQ:SPCX) CEO Elon Musk have also raised concerns about the potential risks associated with AI.
That being said, President Donald Trump opposed slowing AI development or imposing heavy regulation, saying the U.S. must maintain its technological edge over China. He dismissed some AI risk concerns as exaggerated while acknowledging that guardrails could still be introduced.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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