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Investing.com -- Citi analysts are standing by their preference for growth stocks heading into 2025, favoring the Nasdaq-100 (NDX) over the Russell 2000 (RTY) based on a combination of technical and fundamental metrics.
“We continue to view Growth as defensive in the short to intermediate term,” Citi wrote, adding that “this aligns with favoring the NASDAQ-100 over Russell 2000.”
While both indices have a beta of roughly 1.2 versus the S&P 500, Citi noted that “NDX has captured more market upside relative to downside compared to RTY over the past two years,” and this dynamic “is still intact post Liberation Day.”
Citi pointed to a weaker earnings outlook for small caps as a key reason to remain cautious on RTY. “RTY downward EPS revisions have been more pronounced against a lower quality starting point,” the analysts said.
“NDX EPS downgrades are in line with seasonals for now, while RTY cuts have been more aggressive versus history,” added the bank.
Macroeconomic conditions are also unfavorable for RTY outperformance, according to Citi.
“Macro data suggests RTY outperformance may need each of the following: upside economic surprises, lower rates, and a stronger dollar,” they wrote. “The current backdrop is vastly different.”
Moreover, Citi believes the Nasdaq’s composition offers better insulation from policy risk. “Tariff impacts likely push further EPS estimate cuts, but the higher quality NDX may better manage this risk,” they said.
“NDX interest expense as a percent of EBIT is near zero making fundamentals relatively insensitive to higher rates,” said Citi.
That said, the bank acknowledged what could challenge its stance: “Early cycle plus either monetary and/or fiscal stimulus would be combined catalysts needed for RTY over NDX,” they noted.
“This, plus a natural lapping of depressed EPS levels and the Fed resuming cuts could change sentiment.”
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