Following the Earnings: Where Citi’s Chief Investment Office is Adding Equity Risk

Last week, our Global Investment Council selectively increased equity exposure where earnings and secular demand look strongest. We added to cybersecurity, Japan, and U.S. large caps, and we used securitized fixed income as the funding source in our multi-asset class portfolios.

We start with cybersecurity because AI adoption expands the enterprise security perimeter. Every new AI agent brings more users, identities, data access points, and connections across enterprise systems. Each connection creates another endpoint that companies must authenticate, monitor, and protect, and the data flowing into AI workflows often ranks among a firm’s most sensitive.

Industry data shows how quickly this surface is growing. 40% of enterprise users have installed AI-powered browser extensions, and 64% of those extensions can access sensitive internal data. AI bot traffic grew 300% year over year in 2025, while daily API attacks rose 113%

Spending could follow. Projections show security spending for AI systems growing at a roughly 65% compound annual rate from 2026 through 2028, about five times the 13% pace expected for overall cybersecurity spending. In our view, markets still underappreciate this spending wave.

For portfolios, cybersecurity offers exposure to AI adoption without requiring a view on which model or platform ultimately wins. We see it as AI’s insurance policy, since few executives will leave their systems unprotected as adoption broadens.

BOTTOM LINE: Cybersecurity is becoming an unavoidable cost of enterprise AI, and we believe the spending cycle has only begun. It offers investors a durable way to participate in AI adoption without betting on a single model or platform.

Japan combines a cyclical improvement in growth with a structural improvement in corporate profitability. The macro and earnings signals are pointing in the same direction, which gives us the conviction to move Japanese equities from a slight underweight to a modest overweight.

Japan’s growth backdrop remains firmly expansionary. Both its three-month and six-month average PMI readings are expansionary and rising, placing Japan alongside the U.S. with respect to macroeconomic momentum. Outside the U.S., Japan shows some of the strongest growth momentum among developed markets.

Earnings revisions send an even stronger signal. Across MSCI Japan, upgrades now outnumber downgrades by 2.6 to 1 on a three-month rolling basis, well above the long-term average of roughly 1.0. The one-month revision ratio has accelerated sharply, and the three-month trend confirms that the improvement extends beyond a single set of recent estimate upgrades.

Companies are converting this backdrop into realized profits. Japanese corporate profits have climbed to 22% of output, a multi-decade high in data going back to 1970. We treat profitability as our north star for the U.S. cycle, and it carries similar weight for us in other markets, since recessions have historically coincided with declining corporate profits.

Positioning completes the picture. Rolling 65-day ETF flows into Japan remain near flat as a share of assets under management, well below prior peaks in investor enthusiasm, leaving ample room for further participation. Structural tailwinds reinforce the opportunity. Since taking office last fall, the Takaichi government has advanced a pro-growth fiscal agenda, while Japanese industrial companies supply critical materials used in the production of high bandwidth memory, a key component of the AI supply chain.

BOTTOM LINE: Japan offers growth momentum, accelerating earnings revisions, and record profitability without euphoric positioning. We believe this combination supports a larger allocation to Japanese equities as a source of improving momentum outside the U.S.

U.S. large caps remain the quality anchor of our equity allocation. The S&P 500 leads major regions in year-to-date revisions to next-12-month earnings at 29.2%, and it posts the highest interest coverage ratio at 9.4x. These fundamentals offer resilience against a complicated geopolitical backdrop.

The entry point has also improved. As real yields have risen, valuations have compressed, leaving the S&P 500’s price-to-earnings multiple in the 29th percentile since 2020, while earnings growth sits in the 89th percentile. Valuation forms only one piece of our process, but superior fundamentals at a better price strengthen the case.

We continue to favor large caps over small caps, and our conviction has strengthened as the Fed has raised rates and tightened financial conditions. Over the past month, large caps outperformed small caps by more than 6.5%. Year to date, large caps now trail by just 0.9%, narrowing the gap from 14% in June.

Rate volatility adds to the concern. Rising readings on the MOVE Index, which tracks interest rate volatility, have historically coincided with weaker MBS returns. MBS also carry extension risk: when rates rise, prepayments slow and effective duration lengthens, increasing sensitivity to further rate increases. Given our underweight view on duration, we reduced securitized exposure to benchmark weight.

BOTTOM LINE: U.S. large caps combine superior fundamentals with a better entry point following valuation compression. We believe tight spreads and sensitivity to rate volatility make securitized fixed income a logical funding source for these higher-conviction equity opportunities.