Current inflation levels are not a problem for equities, says Citi's Drew Pettit
Speakers
Drew Pettit
— Research Director of U.S. Equity Strategy and ETF Strategy, Citi
Steve Liesman
— Senior Economics Reporter
Summary
Citi U.S. equity strategist Drew Pettit discussed inflation, Treasury yields, and equity positioning. He said 3% inflation is not a problem for equities, arguing that the input-cost inflation headwind is normalizing and the economy remains supportive. He also flagged gold as an inflation-risk trade to watch and described a barbell of small-cap value and large-cap growth while avoiding the middle.
- Citi's Drew Pettit says the economy is working and stronger growth helps equities absorb higher rates.
- He argues 3% inflation is not a problem for equities and that input-cost inflation versus price inflation is normalizing as a margin headwind.
- He sees gold as an easy inflation trade to watch for longer-term inflation risks, with some macro/momentum flows already in precious metals.
- His preferred equity barbell is small-cap value and large-cap growth while avoiding the middle of the size/style box.
- Large-cap growth is supported by AI as a secular driver and still-rising earnings revisions.
- Small-cap value does not need upward revisions; even with 2026 estimate cuts, growth can inflect higher.
- The segment also mentions regional banks and large-cap growth/healthcare names as examples, but without detailed company-specific theses.
Ideas
Inflation near 3% supports equities.
Inflation around 3% is not a problem for equities and historically implies decent pricing power. The bigger headwind has been inflation differentials, with input cost inflation running above price inflation and hurting margins; that pressure is normalizing, and top-line price inflation should converge with cost inflation, removing an abating headwind. With the economy working, more companies showing positive earnings growth, and rates still relatively low, the setup for equities remains good.
Gold is an inflation-risk trade to watch.
When investors worry about runaway inflation and how central banks will react, gold becomes an easy inflation trade, and recent hedge fund/macro momentum and precious-metals ETF flows show people have already moved there. The speaker says this is something to watch for longer-term inflation risks, even though it may not show up in the stock market.
Favor small-cap value and large-cap growth.
In a good growth environment with AI as a secular driver and enough economic strength to offset higher rates, risk is found at the corners of the size and style box rather than the middle. Large-cap growth earnings revisions are still moving higher, supporting earnings momentum. In small-cap value, upward revisions are not necessary; even if 2026 estimates are cut, growth can still be good and inflect higher. The barbell favors small-cap value and large-cap growth while avoiding the middle.
